As we traverse the final stretch of 2023, the noteworthy depreciation of the US dollar dominates the financial landscape
As we traverse the final stretch of 2023, the noteworthy depreciation of the US dollar dominates the financial landscape. Drawing parallels to November 2022, this year sees a significant 3.0% drop, compared to the previous year’s 5.0% decline in November and a subsequent 2.3% in December, highlighting the inherent volatility in currency markets.
Caution is prudent in interpreting recent market dynamics, particularly after last Thursday’s observed price actions. Movements at month-end often detach from fundamental backdrops or overarching trends. Yet, it’s worth noting the dollar’s modest correction, aligning with the upward trajectory of US yields.
Delving into seasonal patterns, a compelling trend surfaces regarding EUR/USD in December. A retrospective analysis reveals that 14 of the last 20 Decembers witnessed a higher EUR/USD, boasting an average gain of 2.6%. Even excluding the outlier of December 2008 (+10.1%), the average gain over the remaining 13 instances stands at a substantial 2.0%. Enhancing this pattern, historical data indicates that in 8 of 11 instances when EUR/USD experienced an upswing in November, a subsequent gain in December followed.
While these seasonal trends offer valuable insights, maintaining a balanced perspective that encompasses broader economic fundamentals is crucial. The realization of the seasonal bias in December 2023 hinges on the potential deceleration of US economic activity. In the absence of such a slowdown, investor optimism spurred by recent declines in inflation may face challenges in sustaining momentum. The upcoming jobs report assumes heightened importance, potentially providing critical cues about the current economic trajectory.
Shifting focus to recent economic indicators, last week’s Beige Book offers insights into the economy’s state. Evidence suggests a notable slowdown, with indications that this trend may manifest more prominently in forthcoming data. A retrospective look at my previous text analysis of the Beige Book underscores the weakest sentiment observed regarding the US consumer since the onset of the 2020 pandemic. Although sentiment has marginally improved in the current Beige Book, it remains subdued.
The overall sentiment index, amalgamating various keyword sentiment indicators, regressed to levels last witnessed in January when inflation exerted significant influence. Furthermore, last week’s Beige Book revealed a discernible decline in net sentiment regarding overall “demand” conditions, reaching the lowest level since November of the previous year. Net sentiment concerning housing fell to its lowest point since January this year, and references to the labour market, which had shown improvement in the last four Beige Books, deteriorated sharply to levels last seen in April.
Of particular significance is the downturn in the labour market, historically a primary justification for tightening in the latter stages of the economic cycle. If clearer deterioration in labour market conditions unfolds, it could potentially fuel a further bull steepening of the 2s10s US Treasury curve, a phenomenon coinciding with dollar depreciation. The coming weeks promise to be a critical juncture for assessing the trajectory of the US dollar amidst evolving economic dynamics.
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