Weekly Market Update 21 August- Dollar Dominance Persists: Ascends to 103.5 in Impressive Rally
Weekly Market Update 21 August- Dollar Dominance Persists: Ascends to 103.5 in Impressive Rally
1. The dollar thrives and claims its throne among its G10 peers as it pursues on with its rally, closing the week near 103.5, upon upbeat retail sales data. On Monday, core retail sales and retail sales m/m reported at 1.0% and 0.7% growth respectively, of which both were beyond market estimates. Such positive figures indicate consumer confidence on the domestic economy reinforces the “soft-landing” narrative for the US. However, gains were quickly pared as empire state manufacturing news revealed a decline in activity, which was worse than what market had forecasted. Nevertheless, insights from the FOMC meeting minutes buoyed and caused dollar rebound to upside of 103.5 as Federal Reserve officials remained largely divided over need for more interest rate hikes and harped on its dependence on the “totality” of economic data to come in its policy guidance. Traders pin a 90% chance that interest rates will stay constant in its September meeting. That said, unemployment claims figures reported at 239K claims, signalled at labour market resilience. This week, markets can anticipate data on flash manufacturing and services PMI to ascertain business conditions and consumer sentiment survey to gauge consumer’s expectations for the economy. On Friday, Fed Chair Powell is expected to deliver his speech in the Jackson Hole Symposium, where markets await his views on economy since Fed’s last meeting.
2. The euro attempted to stand its ground against the strengthened dollar but to no avail as it ended the week below $1.09, as eurozone investors witness the juxtaposition between their economy against US. The German ZEW Economic Sentiment survey revealed an improvement, albeit in negative zone, in investor sentiment as they do not anticipate any further interest rate hikes in the eurozone and the United States. As such, the distinction between the current state of eurozone and US economy becomes apparent, after many consecutive rate hikes, with US coming out as victor between the two, causing capital flight in favour to the greenback.This week, markets await manufacturing and services PMI across eurozone economies and German ifo Business climate survey to assess the productivity within businesses. Meanwhile, for forward guidance, investors can expect to attain insights from ECB President Lagarde speech during the Jackson Hole Symposium on Friday.
3. The pound sterling rejected statistical phenomena of its positive correlation with its euro peer and strengthened above $1.27 against the dollar as UK markets witness surmounting wage pressures and CPI figures. While claimant count change increased to 29K claims, average earnings 3m/y grew by 8.2%, above estimates of 7.3%. Furthermore, jobless rate rose to 4.2%. With surveys indicating that British employers are expecting to raise pay by 5% over the coming year to combat staff’s quitting at the workplace, it adds fuel to the inflationary outlook in UK. Alongside with wage pressures, CPI came in above forecast, with prices growing by 6.8% y/y. A caveat to the onslaught of inflationary pressures would be the cooling of consumer spending as revealed by decline in retail sales by 1.2% m/m. This week, markets expect news on Flash Manufacturing and Services PMI.
4. The yen slipped against the US dollar, causing the USDJPY pair to exceed 145 last week. This was in response to moderated CPI data. The national core CPI’s year-on-year growth reached 3.1%, slightly below the expected 3.3% due to lower oil prices. Additionally, the trade balance indicated a 0.56 trillion yen deficit, surpassing the estimated 0.44 trillion yen deficit. Notably, exports fell 0.3% year-on-year, totaling 8.724.97 billion yen, the first drop in 29 months, driven by weakened foreign demand. Meanwhile, imports plummeted 13.5% to 8.803.70 billion yen. In the week ahead, the market’s attention will be on the BOJ decisions and Tokyo’s core CPI year-on-year figures. Both indicators are forecasted to show a 2.9% growth.
5. The aussie continued its tumble against the dollar, ending the week around $0.64 and extending its 4-week decline. Initially, the currency rose midweek against overselling pressures after the release of a lower than forecasted Wage Price Index, but all gains made by the currency evaporated after a 3.7% increase in unemployment rate was seen at the end of the week, exceeding the 3.6% expected increase. Similar declines in the kiwi were seen midweek, as the RBNZ signalled to the economy that an ease of export revenues were to be expected as commodity prices began cooling globally. After the news conference, the kiwi fell as much as 90 basis points to end the week around $0.59 against the dollar. In the same vein, the loonie experienced significant volatility against the dollar during the week, driven by a higher m/m CPI of 0.6%, doubling that of markets’ expectations, before tumbling down as market players repositioned themselves over the overreaction of the news. At the end of the week, a higher than expected m/m IPPI and RMPI figure, both an indication of a creeping inflationary effect on consumers, caused the currency to strengthen and ended the week around 1.35.
6. Gold prices continue to trend downward, extending the safe haven asset’s losses and ending the week at $1890 per ounce. This came after strong US economic data and indications of economic resilience pushed the dollar northward, as well as market expectations that interest rates will continue to remain high. This week, the markets are keeping their eyes peeled at the Jackson Hole Symposium, where Fed chair J.Powell is likely to offer more signals on the path of US interest rates. The comparison of gold as an asset class constricts the bullion in a tight spot, especially when investors can choose other instruments that are yielding more than 4%. As such, gold may continue finding itself struggling if the symposium this week does not indicate that interest rates will be brought down soon, or even worse for the commodity, that inflationary pressures are still beyond targets and further hikes are necessary.
