Weekly Market Update 16 October – Dollar Rally: Closing Strong at 106.7 Amid Inflation, Geopolitical Tensions, and Yield Surge
Weekly Market Update 16 October – Dollar Rally: Closing Strong at 106.7 Amid Inflation, Geopolitical Tensions, and Yield Surge
1. Dollar strengthened last week to close around 106.7, amidst the trifecta of inflationary pressures, rise of global geopolitical tensions and surging treasury yields. US PPI m/m grew beyond estimates of 0.3% and reported 0.5% growth as cost surges among energy and food products. FOMC meeting minutes reinforced the notion of “higher rates for longer” and the majority of Fed officials voiced the possibility of an extra 25 bps rate hike. CPI y/y beat forecasts of 3.6%, coming in at 3.7% growth. Economist emphasised on shelter cost, which constitutes around 70% of CPI readings, and recognised it as an important source for overall rate of disinflation in 2024. Upon CPI reading, US 10Y treasury yield surged to 4.70%, creating investment demand for the dollar. Despite the above-expectation CPI print, markets are reading a 10% probability of 25 bps hike in the next FOMC meeting in November. Consumer sentiment worsen as consumers expect a rise in inflation and cost of living. This week, markets anticipate surveys on US manufacturing and economic prints for US retail sales to deteriorate, while awaiting for Fed Chair Powell’s speech on Friday on future rate decisions.
2. Following a brief period of strength against the US dollar, the euro has once again weakened, closing near $1.05, primarily due to uncertainties surrounding its rate hike strategy. Final Consumer Price Index (CPI) readings for Germany and France matched expectations, indicating a decrease in inflationary pressures. ECB President Lagarde’s recent speeches emphasised their commitment to achieving a 2% inflation target by 2025 and their cautious stance regarding potential downside risks, such as weakening demand and geopolitical factors. Despite this, inflation remains relatively high in the eurozone, with the possibility of further increases, as noted by ECB’s Nagel. The upcoming focus for markets will be on Germany’s economic sentiment survey and eurozone CPI figures to gauge the inflationary trends across the eurozone.
3. The pound sterling lost ground against the US dollar, erasing some of its mid-week gains and closing below the $1.22 mark, following remarks from BoE’s Governor Bailey, who highlighted a subdued economic outlook in the UK along with a tight labour market. While the GDP m/m growth showed improvement at 0.2%, driven by stronger services output, Governor Bailey acknowledged progress in managing inflation but stressed the need for continued restraint in monetary policy. Amidst the challenging economic conditions, the UK has experienced a significant labour market impact compared to its advanced peers, with a rise of 410K inactivity among the working-age population since the onset of the pandemic, and total hours worked still below pre-pandemic levels. This week, market attention will focus on key economic data, including the claimant count change, CPI y/y figures, and retail sales m/m, to gain insights into the UK’s inflation progress and overall economic outlook.
4. The yen continued its depreciation, falling below the 149.5 per dollar mark and approaching the critical 150-level, as a member of the Bank of Japan (BOJ), Noguchi, downplayed expectations of policy normalisation. Former top Japanese currency diplomat Naoyuki Shinohara also noted that Japan is unlikely to intervene to reverse the yen’s decline, as it largely aligns with economic fundamentals. Additionally, BOJ’s Noguchi stressed the importance of patience in maintaining its Yield Curve Control (YCC) policy, as bond yields remain below the 1% upper limit. He underscored the significance of wage growth as a precursor to sustainable inflation before considering any policy easing measures. In the coming week, markets anticipate that the Core CPI y/y figure will decrease to 2.7%, following its previous reading of 3.1%.
5. Commodity-based currencies, with the exception of the loonie, weakened against the US dollar in response to China’s CPI y/y figure remaining stagnant at 0.0% and a 0.80% y/y decrease in imports. The aussie declined against the dollar, closing below $0.63 last week, and investors are now eagerly anticipating monetary policy meeting minutes and employment data to gain insights into Australia’s economic outlook. Similarly, the kiwi slid against the dollar, closing below $0.59 last week, and this week, investors are looking forward to the CPI q/q data to confirm inflationary pressures in the country. In contrast, the loonie held its ground against the dollar, remaining relatively stable at 1.36, benefiting from a surge in crude oil prices driven by the Israel-Palestine conflict, which bodes well for oil-producing economies like Canada. This week, Canada will release CPI figures, with expectations for a stagnant 0% m/m growth, and a 0.3% decline in retail sales m/m.
6. Gold, much like the US dollar, experienced a significant surge in value as investors sought safety during a period marked by heightened geopolitical tension. As a result, gold closed the week above $1,930 per ounce. Looking ahead, the markets should remain vigilant for any potential escalation of tensions in the Israel-Palestine conflict, as well as the involvement of major economies in the conflict, as these factors could provide additional upward momentum for safe-haven assets like gold.
