Weekly Outlook - Global trade balance figures warn of recession

Last Wednesday, Fed's Powell implied that the Fed would hike by no more than 25bps at the December meeting, supporting risk appetite and weakening the dollar. Now, attention is on the first central bank meetings of the cycle to see if the trend has shifted to more easing. Also, major economies report trade balances, which are expected to show slowing global trade, indicative of an impending recession.

Top 3 events to keep an eye on

• RBA interest rate decision on Tuesday

• Primarily US and secondarily China trade balance data on Tuesday and Wednesday

• BOE interest rate decision on Wednesday

US and Chinese trade figures expected to slow

China's zero-covid policy has brought supply chain concerns back to the fore. But rising inflation worldwide has made consumers less willing to buy too. The slowdown in commerce was significant enough to affect US GDP last quarter but unlikely to have affected China's trade balance as the latest easing zero-covid measures came at the end of the month. China's trade surplus is expected to fall to $81.0B from $85.1B; while the US trade deficit is expected to contract slightly to $73.0B from $73.3B.

USD/JPY could slide lower if the US trade balance contracts more than forecast. The currency pair experienced a steep drop last week after sliding to 133.60, but the swing low could become solid support, contingent on the trade deficit divergence. If lost, the focus shifts to 132.00. A positive print could boost the dollar towards 136.00 and 137.60.

RBA expected to hike rates by 25bps

The RBA has already shown an unwillingness to tighten as much as the Fed, citing liquidity concerns. But, the official measure of inflation hasn't shown signs of coming down yet. Some analysts forecast that the RBA will split the difference and raise by 15bps to bring the rate back to a round number as it currently stands at 2.85%. The market could interpret such a move as dovish.

AUDUSD has been trending higher for most of November as the dollar weakened. If RBA appears dovish, it could push the Aussie down to $0.6585 in the event $0.6640 succumbs to pressure. A 'neutral' policy announcement of a 25bps hike could see a similar price action, with increased potential of forming a range. Aussie could begin its leg towards the 70 cents if the bank surprises with a hawkish tone.

BOC expected to hike rates by 25bps

The Canadian dollar has weakened in line with the greenback but did so due to crude oil sliding amid concerns of impending recession and China's lockdown. The BOC started to slow down rate hikes before the Fed but also experienced a quicker drop in inflation. Even though they might not raise rates as fast, the real rate spread could keep shrinking if Canadian inflation continues to come in lower than the US'.

Loonie remains mixed in the medium-term, with bias tilting more downward than up after pulling in a near-full reversal last Wednesday. $1.3644 is a significant top and could be revisited if bulls recapture $1.3525 on a 'neutral' or 'dovish' policy. Inversely, $1.3225 could form a solid base following the breach of $1.3317, depending on BOC's 'hawkishness'.

Top stories in review

• Chinese authorities soften rhetoric on zero covid, supporting general risk-on sentiment. The dollar slid on the loss of interest for safe havens. Gold topped out at $1810, with $1765 being support.

• Fed's Powell signals less tightening at the December meeting, sending US equities soaring.

• NFP beat expectations, with average hourly earnings growing faster than expected. Intraday dollar gains faltered as job market data put pressure on the Fed. Cable bumped higher, exposing $1.2436 should bulls build a firm floor at $1.2160. 

• European CPI was below forecasts, but the core rate remains high, supporting expectations that the ECB will be more aggressive. EUR/USD traders eye $1.0620 next as long as $1.05 keep bears at bay.

Major calendar events for Dec 5-9 (GMT)

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