Weekly Market Update 2 October – Dollar Ascends Beyond 106.2 as 10-Year Yields Soar
Weekly Market Update 2 October – Dollar Ascends Beyond 106.2 as 10-Year Yields Soar
1. The dollar defied detriments of weakening consumer sentiment, GDP, and PCE price index and strengthened north of half a percentage point to close near 106.2 last week as 10-year treasury yields have surpassed their last October highs. On Tuesday, Conference Board consumer confidence came in lower than expected of 105.5, to report at 103.0, citing deteriorating consumers’ short-term outlook for income, business, and labor market conditions. Such sentiments were reiterated as consumer survey expect lower inflation driven by slowdown in the labour market. While unemployment claims came in under the forecasted 215K claims, the claims creeped up slightly still by 2K claims from previous figure of 202K claims. Moreover, having reported at 2.1% growth, GDP q/q continue its fourth consecutive slide. Although Core PCE price index m/m reported cooler-than-expected price growth at 0.1%, the rise in 10-year treasury yields, primarily driven by FOMC hawkishness, increased demand for the safe haven currency. This week, markets await PMI and NFP data to further assess state of U.S. economy.
2. The euro extended its decline and closed the week below $1.06 as inflation cools within the region. German and Spainish CPI reported at 0.3% and 3.5% growth as expected by markets. However, on Friday, Eurozone flash CPI estimates surprised markets as inflation cools belows market expectation of 4.5%, and reported at 4.3% growth. This is welcome news for the eurozone as its economy experiences waning GDP and PMI growth prospects. As such, markets are pricing in for a pause in ECB’s next rate meeting. A caveat to this would be more currency weakness as its rate rise cycle presumably comes to an end.
3. The pound continues its descent against the dollar, closing at $1.22 at the end of the week. This came despite CBI realised sales figures showed a stronger than anticipated sales volume, highlighting a gradual increase in consumer spending. Instead, the drop of sterling persisted to the end of the week, accelerated by reports on current account figures that were released at GBP 11.2 billion less than market forecast, a slide of over GBP 10 billion from the previous period. There was however some respite nearing the week’s end, as a higher Revised Business Investment q/q and increased Net Lending to Individuals m/m undergirded the optimism narrative currently driving through the UK economy. This week, the markets look forward to the construction PMI as well as the Final Services PMI figures, both of which could either boost or smoulder the UK’s recovery aspirations.
4. The yen’s decline extended after the BOJ announced they will be maintaining their monetary policy, with the yen weakening against the dollar to 149.32 at the week’s close. This fall was accelerated by a higher than anticipated unemployment rate at 2.7%, lower y/y CPI levels at 2.5% and a decreased consumer confidence at 35.2. In the coming week, the yen will face immense difficulty keeping below the 150 levels as the markets eye key zones in a catalyst-less environment for yen strengthening, especially as the markets are now confident that the BOJ will not change their monetary policy anytime soon. This constructs a prime environment for loans to be taken out from Japanese financial institutions, and we will likely see a further weakening of the yen from increased money supply in the circular economy.
5. The aussie weakened slightly against the dollar to end the week below $0.64 as retail sales m/m buckled. Australia’s CPI came in as expected at 5.2% growth, driven mostly by rise in petrol costs. Furthermore, housing prices and shelter-related expenses such as rent rose at a slower rate than typical. Retail sales m/m rose by 0.2%, lesser than the forecasted 0.3%. RBA rate statement is due next week, with consensus expecting a rate pause. The loonie ended the week at close to $1.36 against the dollar after a lack of news release could neither support nor depress prices, with its overall performance lifted up by other currency majors. This week, the markets look forward to employment change and unemployment rate figures, data which would give an insight to possible actions by the BOC in the following weeks. The kiwi closed higher near $0.60 last week, reflecting optimism for New Zealand’s economy as a result of recent GDP figures. These sentiments were reinforced by the results of the ANZ business confidence survey, which found that confidence in a firm’s own prospects has been good for some time and improved in September. Inflation forecasts have fallen marginally, ultimately falling below 5%. This week, markets anticipate rate decision by RBNZ, with most expecting cash rate to remain unchanged at 5.50%.
6. Gold closed at $1848.81, lower than the start of the week as investors flocked from the safe haven commodity after US 10Y rose to spectacular heights. The bullion’s decreasing value, following the Fed’s push for a soft landing as well as a growing optimism in the global economy, could likely be extended over the next few weeks at its present velocity, with an accelerated downward descent likely catalysed by sudden rate hikes by the Feds or greater alpha generating, low-risk opportunities.
