November 22nd Financial News

Explaining our BEER model

Our Behavioural Equilibrium Exchange Rate (BEER) model estimates the real medium-term fair value of G10 currencies using productivity, terms of trades (the price of exports divided by the price of imports), current account balances (as % of GDP) and government spending (as % of GDP). We use quarterly OECD and national account data. Historically, our model has proven to have a good explanatory power (R-squared around 0.55-0.80 across different G10 pairs) and the terms of trade differential has, on average, been the factor explaining most fair value moves.

The aim of the model is to estimate mis-valuation based solely on economic fundamentals – those that generally explain long-term FX fluctuations – therefore stripping out market factors, such as interest rates and equities. However, commodity prices play an important role bearing on the model’s outputs as they influence terms of trade and current account differentials.

Latest BEER model results

Source: ING

The chart above summarises our results using third-quarter data and up-to-date real FX levels vs USD. We normally consider a currency to be severely misvalued beyond the 1.5 standard deviation bound, as that statistically points to a correction in the direction of the fair value. Since the misvaluation is a function of both the fair value and real spot rates, the convergence can occur via either a spot move or a fair value move. The second case encompasses a situation where markets price in a deterioration in economic fundamentals which ends up materialising over the medium term.

Yen stands out on the undervaluation side

The Swiss franc is a structurally overvalued currency – as is often remarked by the Swiss National Bank – and our BEER model results do not imply any specific move in CHF.

What clearly stands out in our November BEER update is the yen, which we estimate to be 18% undervalued in real terms vs USD, beyond the 1.5 standard deviation lower-bound. That is almost entirely explained by the USD-JPY interest rate gap that has consistently pressured the yen. Unlike in 2022, when the energy prices caused a deterioration in Japan’s terms of trade position, there are significantly less structural economic headwinds justifying such a cheap yen for the moment.

This result feeds into our view that USD/JPY has large downside potential in the long run. Still, since we see President-elect Donald Trump’s policy mix resulting in a shallower easing path by the Federal Reserve, we remain rather cautious on how far relatively strong fundamentals can offset the pressure from wide rate differentials. These are medium to long-term exchange equilibrium estimates, meaning a pair can trade in moderate undervaluation territory for several quarters.

EUR/USD would look quite cheap at parity

In the rest of the G10, there are no misvaluations beyond the 1.5 standard deviation line. SEK remains quite cheap (around 11% undervalued versus the EUR), but we believe a recovery will be delayed further by the Riksbank’s aggressive easing cycle.

Part of SEK’s undervaluation boils down to the generalised stabilisation in economic fundamentals – mostly, the terms of trade – for European countries relative to the US, following 2022’s commodity-led sharp terms of trade deterioration. As shown below, the euro is indeed enjoying a slight improvement in the terms of trade differential relative to the US and, by extension, a stable fair value.

EUR/USD fair value has stabilised after a big decline

Source: ING, Macrobond

Due to its lower volatility, EUR/USD has a history of much smaller misvaluation swings compared to most other G10 peers, meaning the 1.5 standard deviation band is also tighter (+/- 9%). EUR/USD is currently 5% undervalued in real terms, meaning a move to parity from around a 1.05 spot could trigger alarms of stretched misvaluation in our BEER model. That is barring a material further deterioration in the terms of trade, which is the contributor to EUR’s fair value that is most susceptible to shorter-term volatility. In simpler terms, we would need to see a commodity price shock to justify nominal EUR/USD consistently below parity within the next year or so, and that is not our base case.

This consideration is embedded in our latest EUR/USD forecast. We estimate that EUR/USD will trade below 1.05 throughout 2025-26 on the back of Trump’s policy agenda and large European Central Bank cuts, but in line with the BEER model results, we do not project a sustainable move below parity. We target 1.02 for year-end 2025 and 1.05 for the longer term.

SINGAPORE (Nov 22): Singapore on Friday upgraded its economic outlook for 2024 as third quarter gross domestic product growth beat expectations and initial estimates, helped by stronger semiconductor production and engineering demand.

GDP rose 5.4% year-on-year in the third quarter, government data showed, faster than the 4.1% official advance estimate released last month and a median forecast of 4.6% in a Reuters poll of economists.

The trade ministry also raised its GDP growth forecast for 2024 to 3.5% from a previous range of 2.0% to 3.0%.

"We are not ruling out that the number could be higher than 3.5%," Beh Swan Gin, permanent secretary at the trade ministry, said.

GDP for the July-September quarter was also higher than the annual growth of 3.0% in the second quarter. On a quarter-on-quarter, seasonally adjusted basis, GDP expanded 3.2% in the July to September period, higher than both the advance estimate of 2.1% and the second quarter growth of 0.5%.

Beh said the higher-than-expected 3Q GDP was due to demand for semiconductors that spilled over to the precision engineering industry with higher output of industrial machinery and semiconductor equipment.

"Global monetary easing and China’s fiscal stimulus will likely support growth going into 2025, despite the risk of an escalation in the US-China trade war," said Maybank economist Chua Hak Bin.

The trade ministry said it expects growth of 1.0% to 3.0% in 2025, adding that global economic uncertainties have increased, including uncertainty over the policies of the incoming US administration.

"If tariff hikes happen...there will be renewed inflationary pressures, which could disrupt the pace of monetary policy easing and keep financial conditions tighter for longer in the US," said Beh.

The Monetary Authority of Singapore (MAS) left monetary policy settings unchanged last month in its last review of the year as inflation pressures continued to moderate and growth prospects improved. The next policy meeting is in January.

Maybank's Chua said next week's inflation data will be a key indicator to watch.

"If core and services inflation remains sticky, MAS may not ease in January," he said.

MAS has said core inflation should ease to around 2% by the end of this year. Annual inflation was 2.8% in September.

Source: Theedgemarkets

West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $70.25 on Friday. The WTI price edges higher as an escalation in the Russia-Ukraine conflict raises the fear of crude supply disruption. The fears of a potential escalation in the Russia-Ukraine conflict fuelled the WTI price this week after Ukraine used missiles supplied by the US and UK into Russian territory. On Thursday, Russian President Vladimir Putin announced the launch of a hypersonic medium-range ballistic missile attack on a Ukrainian military facility. Putin also warned the West that Moscow could attack any country's military installations that utilised weapons against Russia, per Reuters. "The market's focus has now shifted to heightened concerns about an escalation in the war in Ukraine," said Ole Hvalbye, commodities analyst at SEB.

On the other hand, a rise in US crude inventories last week might weigh on the black gold. The Energy Information Administration's (EIA) weekly report showed Crude oil stockpiles in the United States for the week ending November 15 increased by 0.545 million barrels, compared to a rise of 2.089 million barrels in the previous week. The market consensus estimated that stocks would increase by 0.400 million barrels. Furthermore, the renewed US Dollar (USD) demand might cap the upside for the USD-denominated oil for the time being as it makes oil more expensive for holders of other currencies, which can reduce demand. The US Dollar Index (DXY), a measure of the value of the USD against a basket of six currencies, currently trades near 107.05 after hitting a fresh year-to-date high of around 107.15.

WTI Oil FAQs

What is WTI Oil?

WTI Oil is a type of Crude Oil sold on international markets. The WTI stands for West Texas Intermediate, one of three major types including Brent and Dubai Crude. WTI is also referred to as “light” and “sweet” because of its relatively low gravity and sulfur content respectively. It is considered a high quality Oil that is easily refined. It is sourced in the United States and distributed via the Cushing hub, which is considered “The Pipeline Crossroads of the World”. It is a benchmark for the Oil market and WTI price is frequently quoted in the media.

What factors drive the price of WTI Oil?

Like all assets, supply and demand are the key drivers of WTI Oil price. As such, global growth can be a driver of increased demand and vice versa for weak global growth. Political instability, wars, and sanctions can disrupt supply and impact prices. The decisions of OPEC, a group of major Oil-producing countries, is another key driver of price. The value of the US Dollar influences the price of WTI Crude Oil, since Oil is predominantly traded in US Dollars, thus a weaker US Dollar can make Oil more affordable and vice versa.

How does inventory data impact the price of WTI Oil?

The weekly Oil inventory reports published by the American Petroleum Institute (API) and the Energy Information Agency (EIA) impact the price of WTI Oil. Changes in inventories reflect fluctuating supply and demand. If the data shows a drop in inventories it can indicate increased demand, pushing up Oil price. Higher inventories can reflect increased supply, pushing down prices. API’s report is published every Tuesday and EIA’s the day after. Their results are usually similar, falling within 1% of each other 75% of the time. The EIA data is considered more reliable, since it is a government agency.

How does OPEC influence the price of WTI Oil?

OPEC (Organization of the Petroleum Exporting Countries) is a group of 12 Oil-producing nations who collectively decide production quotas for member countries at twice-yearly meetings. Their decisions often impact WTI Oil prices. When OPEC decides to lower quotas, it can tighten supply, pushing up Oil prices. When OPEC increases production, it has the opposite effect. OPEC+ refers to an expanded group that includes ten extra non-OPEC members, the most notable of which is Russia.

Source: FXSTREET

Yen rebounded broadly yesterday as market participants interpreted comments from BoJ Governor Kazuo Ueda as a potential signal for a rate hike in December. Ueda noted that there is still a month before the next policy meeting and that the central bank will have a substantial amount of data to consider by then. While he did not commit to any policy changes or express a clear intention to adjust interest rates, this “openness” was well-received by Yen bulls. The mere possibility of BoJ adopting a more hawkish stance provided enough impetus for Yen to strengthen against its peers.

In contrast, Euro declined broadly, breaking to the downside against both Aussie and Loonie, although it remained range-bound against Dollar. ECB attempted to downplay the significance of the previous day’s stronger-than-expected wage growth data, which is a clear indication that they are prepared to deliver another rate cut in December. Notably, one of the known dovish members of ECB Governing Council suggested the idea of continuous rate cuts until the deposit rate reaches neutral level of 2%. While it may be premature to project policy that far ahead, it appears that some officials are already setting the stage to manage market expectations for the coming year.

Overall, for the week so far, Euro is the worst-performing major currency. Despite yesterday’s rebound, Yen remains the second weakest, followed by Dollar. Aussie is currently the strongest performer, followed by Loonie and Swiss Franc. Sterling and Kiwi continue to occupy middle positions in the performance rankings.

Technically, EUR/CAD’s fall from 1.5225 resumed by breaking through 1.4710 temporary low. Near term outlook will now stay bearish as long as 1.4888 resistance holds, and deeper fall would be seen to 1.4592 support. Firm break there would argue that the decline from 1.5225 is at least correcting the whole uptrend from 1.2867 (2022 low). Deeper fall should then be seen to 38.2% retracement of 1.2867 to 1.5225 at 1.4324.

In Europe, at the time of writing, FTSE is up 0.32%. DAX is up 0.23%. CAC is down -0.29%. UK 10-year yield is down -0.0357 at 4.438. Germany 10-year yield is down -0.035 at 2.318. Earlier in Asia, Nikkei fell -0.85%. Hong Kong HSI fell -0.53%. China Shanghai SSE rose 0.07%. Singapore Strait Times fell -0.12%. Japan 10-year yield rose 0.0269 to 1.096.

US initial jobless claims falls to 213k, vs exp 220k

US initial jobless claims fell -6k to 213k in the week ending November 16, below expectation of 220k. Four-week moving average of initial claims fell -4k to 218k.

Continuing claims rose 36k to 1908k in the week ending November 9, highest since November 13, 2021. Four-week moving average of continuing claims rose 5k to 1879k, highest since November 27, 2021.

Fed’s Barkin avoids prejudging December decision, cites vulnerability to cost shocks

Richmond Fed President Tom Barkin told the Financial Times he would not “prejudge” the rate decision at the December meeting. He acknowledged the dual challenges of elevated inflation and labor market strains.

“If you’ve got inflation staying above our target, that makes the case to be careful about reducing rates,” he said. “If you’ve got unemployment accelerating, that makes the case to be more forward-leaning.”

Barkin emphasized growing vulnerability to cost shocks which he said was higher than it might have been five years ago. He also pointed to business concerns over potential inflationary pressures stemming from President-elect Donald Trump’s proposed tariffs and deportation policies.

However, he added that Trump’s plans to boost domestic energy production could have a counteracting “disinflationary” effect.

While businesses are apprehensive about economic policy changes under the new administration, Barkin underscored that the Fed would not preemptively adjust its policy.

“We shouldn’t try to solve it before it happens,” he remarked.

ECB’s Stournaras supports continuous rate cuts until neutral level reached

Greek ECB Governing Council member Yannis Stournaras expressed strong support for further monetary easing, suggesting a rate cut at every meeting moving forward until the policy rate reaches the “neutral rate,” estimated at around 2%.

Speaking with Bloomberg TV, Stournaras described the proposed quarter-point reduction in December, which would bring the deposit rate to 3%, as the “right response” to current economic and inflation conditions.

He refrained from ruling out a larger 50 basis-point cut, and emphasized that external factors, including market reactions and the Fed’s actions, remain uncertain.

Stournaras also downplayed concerns over the sharp third-quarter rise in negotiated wages, the highest since the euro’s inception in 1999, stating, “We expect that to fall in the months to come. We thought it’s one blip but not a permanent increase.”

ECB’s Villeroy: Wage data backward-looking, advocates agile pragmatism

French ECB Governing Council member François Villeroy de Galhau, speaking at a conference yesterday, emphasized a cautious and pragmatic stance on monetary policy, downplaying the significance of recent stronger-than-expected wage data.

He described the Q3 surge in negotiated wages as a “backward-looking” indicator, primarily reflecting the “lagged effects” of earlier negotiations in Germany, which were already factored into the ECB’s September projections.

Villeroy highlighted a shift in risks, stating that the balance for both growth and inflation now tilts to the downside. He also noted that potential US tariffs are “not expected to alter significantly the inflation outlook in Europe”.

Against this backdrop, Villeroy reaffirmed the ECB’s commitment to “continue to reduce the degree of monetary policy restriction,” while underscoring that the pace must be guided by “agile pragmatism” and “full optionality” in future decisions.

BoJ’s Ueda: FX impact on economy and prices taken ‘seriously’ in policy decisions

At a forum yesterday, BoJ Governor Kazuo Ueda admitted that the central bank takes exchange rate movements “seriously” when forming its economic and inflation outlook. He also stressed the importance of understanding the factors driving current exchange rate changes and their broader implications.

On monetary policy, Ueda reiterated that decisions would be made “meeting by meeting,” based on the most up-to-date information. With a month remaining until December meeting, Ueda noted that additional data would provide greater clarity for the central bank’s deliberations.

Commenting on potential impacts from the policies of US President-elect Donald Trump, Ueda admitted that it was too hard to predict. He affirmed that “as soon as the new administration announces new set of policies, we would like to incorporate into our economic outlook.”

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 154.68; (P) 155.28; (R1) 156.04; More…

USD/JPY dips notably yesterday but stays in range of 153.27/156.74. Intraday bias remains neutral at this point. On the upside, break of 156.74 will resume the whole rally from 139.57 towards 161.94 high. On the downside, though, break of 153.27 will resume the correction towards 38.2% retracement of 139.57 to 156.74 at 150.18.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low). The range of medium term consolidation should be set between 38.2% retracement of 102.58 to 161.94 at 139.26 and 161.94. Nevertheless, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.

Source: MarketPulse

Bitcoin made snap gains on Nov. 21 as a liquidity squeeze took BTC price action to near $100,000.

BTC/USD 1-hour chart. Source: TradingView

Bitcoin gaps higher with sellers above $100,000

“I think any deep sweep from here is a bid, else price will continue to go parabolic above $100K.”

BTC/USDT 15-minute chart. Source: Skew/X

“A ton of supply unloading between 90-100 for this reason. Teleportation occurs beyond $100K as the masses re-enter with FOMO.”

BTC liquidations (screenshot). Source: CoinGlass

BTC price support retest “welcome”

“I’d welcome a test of local support at $91k, there’s a small buy wall at $95k that may keep price elevated and momentum high.”

BTC/USDT order book data. Source: Material Indicators/X

Source: Cointelegraph

It is worth keeping an eye on the RSI as it gets near oversold levels of 30.0. This on its own does not mean we will see a bounce back, but it does increase the odds of it happening, nonetheless.

Source: Poundsterlinglive