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13 Jul 2023

13 Jul 2023

Balance of payment risks remain substantial.

A somewhat more bearish outcome for pound would likely come from a more protracted and pronounced period of UK and global economic weakness, especially if it occurs with inflation still well above target. A “stagflation” scenario – in which growth stays weak, and inflation remains uncomfortably high – could accentuate the country’s yawning current account deficit (~3.7 percent of gross domestic product). A further deterioration in an already-precarious balance of payments position could see the pound adjust lower to attract the capital needed to fund the external imbalance. GBPUSD versus UK terms of trade

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13 Jul 2023

Growth headwinds are emerging.

The European Central Bank’s economic projections look increasingly over-optimistic, with a vast array of indicators pointing to a potential double-dip downturn in the common currency area by the end of the year. Support to growth from lower energy prices has faded, housing prices are negative or falling in most core economies, corporate insolvencies are creeping higher as earnings weaken, and S&P’s euro area composite purchasing manager index slipped back into contractionary territory in June. Further weakness beckons: Exports to both of the euro area’s largest markets – China and the United States – are looking vulnerable as the global manufacturing...

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13 Jul 2023

China might defy its skeptics once again.

We think a bullish scenario could unfold if authorities unveil a larger and more broad-based stimulus package to prop up the fading economic expansion. In our assessment, a more definitive re-acceleration in China’s growth pulse, particularly across the domestically-oriented services sector, could encourage a recovery in capital inflows as the economy outperforms on a relative basis. Alternatively, a more shallow global slowdown, coupled with a faster and less disruptive deceleration in inflation – which might enable developed-economy central banks to shift away from restrictive policy stances sooner – could be a negative for the US dollar, helping support risk assets...

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13 Jul 2023

Yield differentials could narrow – and even flip.

Many things could go right for the Canadian economy in the months ahead. Housing markets have the potential to go from strength to strength as immigration flows lift demand and elevated financing rates limit the supply response from builders and existing homeowners. High and stable equity market valuations may support household wealth effects. Aggregate nominal household incomes might keep rising as persistent labour market imbalances put upward pressure on wages. And exports could hold up, particularly if the US consumption engine keeps running and a comprehensive stimulus effort from Chinese policymakers supports global commodity demand. The Bank of Canada –...

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13 Jul 2023

Vulnerabilities are significant.

Relative to our central case, a bearish scenario for the Australian dollar might stem from a deeper and more prolonged economic slump. A more significant slowdown is likely to flow through more negatively into commodity prices and risk assets, and weigh on growth-linked currencies. In a similar vein, a protracted period of high inflation could prompt central banks to continue to raise interest rates in the face of slowing activity and weakening labour markets, fanning the flames of financial stability concerns. This is particularly relevant for Australia, given the household sector’s high debt burden and the banking sector’s exposure to...

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