Forex Insight: Major Currencies Jumped in The Past Week, And the Fed's Dovish Turn Is Not the Only Reason

Last Friday's non-farm payroll data reinforced the Fed's dovish expectations. CME FedWatch shows that the probability of raising interest rates in December is merely 9.8%. It's not just U.S. stocks that are reveling in the capital market. The currencies of most countries have jumped since last week.

Some countries such as Canada, Australia, and Singapore have been affected by the strong US dollar in the past year or so, and now the assets of these countries are expected to rebound.

■ Australia: November rate hike means economy is still overheating

The Reserve Bank of Australia increased interest rates by a quarter of a percentage point to 4.35 percent on November 7th and raised its inflation expectations for 2024.

The action by the Australian central bank runs contrary to decisions by global peers, including the Federal Reserve and the European Central Bank, which all opted to hold rates in the past month.

RBA said that while inflation had peaked this year, it was still “too high” and was returning to a target range of 2 to 3 percent — which it is now expected to reach in 2025 — more slowly than anticipated.

Australia's relationship with its largest trading partner has improved recently with Prime Minister Anthony Albanese's visit to China. Besides, October trade data from China on Tuesday showed a welcome beat for imports. It's positive for China-proxy trades such as AUD.

■ Canada: Neutral rate is likely drifting higher

Bank of Canada Governor Tiff Macklem said the neutral rate of interest is likely rising due to higher deficits, aging societies, and energy transition. He said he wasn't fully confident in the central bank's decision to leave their estimate of the measure unchanged earlier this year.

Exports account for more than 30 percent of the Canadian GDP. Driven by higher sales of unwrought gold, silver, and platinum group metals (+89.5%), Canada posted a trade surplus of CAD 0.72 billion in August 2023. The country's resource structure allows its trade to be more balanced than its North American neighbors.

■ Singapore: The new haven in Asia

Singapore's economy looks to be in a Goldilocks situation. The country has maintained an unemployment rate that, as Maybank economist Brian Lee noted, “remains near an eight-year low.” The tight labor market stems from factors such as a pandemic-induced shortage of foreign workers and last year's ‘Great Resignation’ phenomenon.

Total employment excluding migrant domestic workers rose for the eighth straight quarter by 24,000 in the third quarter. Employment growth came from both residents and non-residents, with resident employment expanding in growth sectors like financial services and professional services - which generally had higher-paying jobs - as well as in health and social services. Meanwhile, non-resident employment expanded in sectors such as construction, retail trade, food and beverage services, and administrative and support services.

The International Monetary Fund on Tuesday upgraded its 2023 gross domestic product growth forecast for China to 5.4% from 5%, citing a "strong" post-COVID-19 recovery.

The upward revision followed a decision by China to approve a 1 trillion yuan ($137 billion) sovereign bond issue and allow local governments to frontload part of their 2024 bond quotas in a move to support the economy.

It is worth noting that after successive interest rate hikes, the real estate markets in some countries, such as Australia and Canada, are facing increasing pressure, which means that their economies may also face headwinds.

Still, the weakening of the US dollar will give both developed and developing markets a window of opportunity after the Federal Reserve's consecutive interest rate hikes.