Weekly Market Update 21 October – Dollar’s rally eased on speculations that Fed could slow down the pace of its hikes

Weekly Market Update 21 October – Dollar’s rally eased on speculations that Fed could slow down the pace of its hikes

1. The Dollar dipped to 112 at the start of the week, but pared recent losses to rise above the 113 mark on Friday, while riding on the back of appreciating Treasury yields. On Thursday, U.S 10-year Treasury yield rose to its highest level since 2008 to 4.154%, while U.S 2-year Treasury yields attained a 15-year year high of 4.582%. A rising yield is bullish for the Dollar as capital flows are attracted to higher yielding currencies. Mixed corporate results and economic indicators provided some evidence of an economic slowdown, threatening the Dollar’s bullish bias. However, a dip in the number of unemployment claims to 214,000 this month well below forecasts of 229,000 indicates that the labour market remains tight. Recent data shows that the eighth consecutive monthly decline of existing homes sales fell to its lowest since May 2020 at 4.71 million; reflecting an environment of rising prices that continues to pressure the Fed towards a hawkish direction.

2. Across the Atlantic, Euro traded at around 0.98 against the greenback, hovering near its 20-year low as a tight labour market and hotter-than-expected inflation data in the US paved the way for further aggressive tightening cycles by the Fed and boosted demand for the Dollar. With the Eurozone battling supply-driven inflation, exacerbated by rising energy costs, limited storage facilities and the winter season approaching, markets are expecting another 75 bps rate hike by the ECB in its October meeting. ECB’s policymakers also echoed the hawkish stance indicating a need for higher interest rates to rein in inflation despite recession risks. Elsewhere, Sterling pared gains as investors digested poor UK retail sales data which recorded the second month of consecutive decline. Political turmoil with Liz Truss’s resignation as the Prime Minister and a hunt for her replacement also weighed on the Pound’s outlook. In the coming week, a slew of UK’s PMI data should reflect an economic downturn in the UK.

3. Commodity currencies pared recent losses against the greenback for the week, supported by the risk-on market sentiment following a pullback in risk assets across the board. Speculations that the Fed might ease the pace of interest rate hikes amid concerns of overtightening also provided a short-term boost for commodity currencies against the Dollar. However, upsides are limited as recession concerns and inflation remain in the spotlight for most G7 economies. China’s sluggish growth prospects and zero-covid policy, with parts of the country still in lockdown also weighed on the Aussie and Kiwi Dollar, considering that both countries have China as one of their largest trading partners. Meanwhile, hot inflation data as annual consumer prices data in New Zealand rose to 7.2% in the third quarter, surpassing market forecasts of 6.7% also cemented expectations for further rate hikes by the RBNZ, following its 50bps hike in October. Likewise, Loonie rallied against the greenback on the heels of rising price pressures. Annual consumer inflation in Canada eased for the third month to 6.9% in September but exceeded market forecasts, underpinned by higher food prices. In light of the latest inflation report, markets expect the BoC to deliver a 75bps hike in October’s meeting. Canada’s retail sales data in August also pointed to robust domestic growth amid macro headwinds and inflation, paving way for more rate hikes by the BoC.

4. Oil prices hovered at around $84 per barrel for the week, as supply constraints were overwhelmed by a weaker demand outlook. Chinese customs data also showed that demand for the world’s largest crude importer remained muted in September, weighed down by ongoing lockdown limitations and export restrictions on fuel. On the other hand, OPEC+ decision to cut production output by 2 million bpd in November and speculations of further intervention by the oil cartel continue to limit the downside in oil prices. Elsewhere, Gold pared recent losses for the week as the dollar-denominated asset benefited from the short-term Dollar’s retracement amid speculations that the Fed might ease the pace of its tightening cycles. However, any upsides in the bullion could be limited as higher interest rates prospects dampened the appeal of the non-yielding asset, with Dollar seen as a favoured safe-haven alternative amid the economic uncertainties.