Weekly Market Update 14 August- Resilient Dollar Breaks Through 102.8 Ceiling, Outshining G10 Currency Peers

Weekly Market Update 14 August- Resilient Dollar Breaks Through 102.8 Ceiling, Outshining G10 Currency Peers

1. Riding off from positive U.S. economic data, the dollar index has, yet again, proved resilient among its G10 currency peers to close the week off above 102.8 on the back of optimistic inflation figures. On Thursday, Core CPI m/m and CPI y/y came in at 0.2% and 3.2%. With July’s CPI buoyed predominantly by shelter costs, a lagging component, market’s expectation of future inflation attenuates. Nevertheless, markets should maintain their guard as PPI m/m figures remains elevated, above estimates, at 0.3%. Unemployment claims, albeit trending lower, surged above forecasts, at 248K. Revealed within survey on Friday, consumer sentiments remains bright as year-ahead inflation expectations eases. Such confluence of encouraging statistics paint the enticing idea of a “soft-landing” amidst economists and consumers, bolstering the dollar strength. This sentiment is brought forward into this week’s economic news as forecasts elucidate bullish outlooks. This week, markets await retail sales, empire state manufacturing index and FOMC meeting minutes to affirm the wave of positive sentiments conveyed in recent times.

2. Amidst dollar dominance, the euro yielded as it ended the week off below $1.10, upon an uncertain economic outlook, which stands in sharp contrast with its U.S. counterpart. From ECB Christine Lagarde’s poignant speech after announcing yet another 25bps rate hike in the previous ECB’s meeting, market sentiments turn sour as the ECB president painted a “deteriorated” economic outlook. This serves as direct contrast to US’s economy, despite consecutive rate hikes, thereby diminishing the attractiveness of the euro. Worse yet, recent inflation data, as evident within German CPI and CPI Flash estimates, pointed towards further upside to ECB’s refinancing rate. Hence, with the series of strong US economic data last week which hinted at a possible “soft landing”, the euro yielded against the greenback as capital took flight to the safe-haven greenback. Along with monetary tightening, increased restraint in fiscal spending in 2024 will put additional pressure on eurozone’s economy as they strive to reduce public debt from 90%, during pandemic and energy crisis, to 60%. This week, market anticipate news on economic sentiment within Germany, Europe’s largest economy.

3. Despite upbeat GDP m/m figures, the pound sterling fails to go against the strong tide within the currency markets, that is the greenback, and closed the week below $1.27. GDP m/m came in above estimates, at 0.5% growth and prelim GDP q/q is confirmed to grow by 0.2%, beyond forecasts of 0%. This sets the narrative for BOE to continue rate hikes. Traders have priced in a 90% probability of a 25bps. Meanwhile, investors in the United Kingdom are bracing for bleak economic prospects, as PMI readings remain subdued and the Bank of England’s quarterly report implies that GDP will remain below pre-pandemic levels “in the medium term.” This week, market expect news on the labour market, and CPI y/y, which is forecasted to drop to 6.8% from previous reading of 7.9%.

4. Yen, the safe-haven currency, loses its lead against the dollar to close near 145 as it pares all the gains from July, upon uncertain economic outlook. Weeks ago, BOJ’s policy makers shocked markets, once again, in its surprise tweak to its Yield Curve Control (YCC) regime by allowing 10-year yields to go as high as 1%. Upon release of such statements, the yen strengthened 1% against the dollar as higher domestic yields attracted Japanese investors to switch out of their overseas investments. Furthermore, it hinted at a future dismantling of the YCC program. However, gains were quickly pared as Governor Kazuo Ueda insisted that the policy tweak was not a step toward policy normalisation. Nevertheless, most traders are placing bets on the end of a negative yield, which is spurred as BOJ makes a surprise comment that currency issues are part of future policy guidance. In such a scenario, while it is expected that yen should be appreciating in expectation of greater domestic interest rates, yen sinks as concerns about its ballooning debt surface. After years of quantitative easing, Japan’s national debt rose to almost 260% of GDP. In fact, Japan is expected to spend 22.1% of its 114 trillion yen ($795 billion) national budget for this year on debt-servicing costs. Hence, Japan’s creditworthiness is now placed in the spotlight, causing weakness in the safe-haven currency.

5. The loonie ended the week above 1.34 against the dollar after the Canadian trade balance proved to be weaker than expected, with the actual deficit just shy of a billion more than the anticipated deficit. The weakened loonie also took a hit from a weakened sell-off in oil prices, noting that the performance of the commodity currency relies heavily on oil trades with the US. This week, Canadian CPI results will be released, and an expected decrease in y/y CPI figures across the board. Figures higher than anticipated levels will likely propel the loonie northward and end its losing streak for the week.The aussie fell against the dollar to close the week off below $0.65 after Chinese import and export results fell sharply, pointing to a gloomy economic state in the region. Although the low economic confidence in the currency was reiterated by the Westpac Consumer Sentiment, the NAB Business Confidence produced antithetical results to the Westpac, suggesting that businesses are optimistic of improvements in business conditions. This week, we anticipate news for the m/m wage price index changes, employment change and unemployment rate as RBA members gather to provide insights into Australia’s economic conditions.The kiwi extended its losses in the week, weakening against the dollar to end the week off below $0.60. This is despite inflation expectations increasing to 2.83% q/q, higher than previously recorded in the past quarter. This week, key figures will be released to the public during the RBNZ’s monetary policy statement, with market expectations of the Official Cash Rate (OCR) to remain constant at 5.5%. Details on future interest rate hikes will come later in the week.

6. Gold prices held below the $1,920 an ounce mark on Friday as a stronger dollar and higher Treasury yields caused the commodity to plummet over the week. Despite a cooler than expected CPI figure in July, the markets remain minimifidian over the anticipated halt in rate hikes as oil forecasts point towards an indefinite increase in inflationary figures. This is supported by higher than expected producer inflation, with figures signalling that there is more to be done to dampen economic price pressures. In amalgamation, these factors caused the downward trend for gold, and we can expect that later this week, if US unemployment claims come out to be lower than expected, the downward pressure for gold will persist and the commodity may end the week near key support zones.