Weekly Market Update 14 October – Dollar pared gains on risk-on mood while Oil prices edged lower on weaker demand outlook

Weekly Market Update 14 October – Dollar pared gains on risk-on mood while Oil prices edged lower on weaker demand outlook

1. Dollar index gave up earlier gains and fell sharply to hold just above 112 as risk-on market sentiment saw across the board gains in global equities on Thursday. US stocks have staged a firm comeback after dipping to 2 year lows with the DJI, S&P500 and IXIC all recording gains of over 2%, diminishing demand for the safe haven currency. At the same time, recent CPI data indicate that inflation shows no sign of abating. Month-on-month CPI changes beat market expectations by double the pace with a 0.4% month-on-month increase in September while rising 8.2% compared to a year earlier, far above the Fed’s target of 2%. The Fed is projected to deliver another interest rate hike in November and lift rates to 4.75%-5% by early next year. Changes in the Dollar index are caught in a limbo between a protracted hawkish Fed campaign and a risk-on mood. Investors will be monitoring unemployment and manufacturing data due for release in the coming week ahead.

2. The Euro maintained its value against the greenback, trading at similar levels to the previous week but dipping below the $0.97 mark at times across the week. The Euro recovered from a low of $0.96 on Thursday to a peak of 0.98 on Friday, reflecting the dip in the Dollar. The decline of the Euro which has seen a constant bearish bias since mid-2021 has largely been driven by soaring energy import costs. Recent data released for August recorded a EUR 50.9 bn trade deficit in the Euro Area, representing the tenth consecutive and biggest gap on record. Similarly, the EU posted a trade deficit of EUR 309.6 bn between Jan-Aug, a significant reversal from a surplus of 91.8 bn compared to last year. Relations with Russia; the EU’s primary supplier of fossil fuels, is projected to remain tense in the long term amidst a protracted conflict in Ukraine that has seen punishing retaliatory cuts to energy flows into the West. The Euro’s bearish trend has closely correlated with a negative balance of trade figures that are likely to continue worsening. Despite fears of a looming recession, the latest ECB meeting minutes indicate that policymakers are determined to keep raising rates even if economic growth is compromised. Investors are expecting another rate hike announcement at the ECB meeting next week, although the previous rate hikes have shown little effect on reversing the Euro’s decline.

3. Meanwhile, the British Pound depreciated almost 1% to $1.12 on Friday after making steep gains on Thursday which reached a 1-week high of $1.137. Although the radical tax cuts which saw the Sterling tumble last month were scrapped on Friday along with the BoE’s bond buying scheme, the Sterling is still under heavy selling pressure amidst persistent concerns about the UK’s poor economic outlook. On Wednesday, the data released showed that the UK economy unexpectedly shrank in August, highlighting the prospect of an impending recession.

4. The Canadian dollar pared gains to trade at around $1.38 on Friday following Dollar’s recent weakness but remained supported, on the back of higher-than-expected inflation in the US and bets that The Fed will continue to increase interest rates. Markets currently expect a 75bps rate hike by The Fed compared to a 50bps increase by the BoC. Fears of an impending recession have also been fuelled by recent data showing that manufacturing sales fell 2.0% to $70.4 billion in August, the fourth consecutive monthly decline. Similarly, the Aussie and Kiwi extended their bearish bias to $0.62 and $0.56 respectively by the end of the week amidst fears that the slowdown in global Manufacturing PMI to 48.4 in September; the lowest since Covid started, could weigh down on the trade dependent economies. While both central banks continue to maintain a hawkish stance to fend off growing inflationary pressure, the Kiwi is expected to outperform the Aussie with a 50bps rate hike announced last week, compared to the RBA’s smaller than expected increase of only 25bps.

5. Closely following an inverse correlation with the Dollar, Gold peaked on Thursday following a dip in the Dollar, but ultimately extended its bearish trend to trade below $1650 an ounce on Friday as the Dollar recovered. Hotter-than-expected inflation and bets that the Fed will hike interest rates further have continued to weigh heavily on the price of Gold. Meanwhile, Oil prices on Friday plummeted to below $86 a barrel despite rising to a peak of $93 a barrel last week after OPEC trimmed the oil demand outlook. The bearish bias has been extended on the back of a rising Dollar, which has made the fuel more expensive for buyers of other currencies. After a week-long national holiday in China, the world’s largest consumer of oil has experienced infection flares that have intensified strict Covid-zero lockdowns, dampening energy demands for Oil.