Weekly Market Update 28 August- Dollar’s Robust Rally Towards 104.4: Post Jackson Hole Analysis
Weekly Market Update 28 August- Dollar’s Robust Rally Towards 104.4: Post Jackson Hole Analysis
1. The dollar ended the week strong at around 104.4, closing at 1.36% highs from its troughs, with all initial drawdowns incurred during the week almost immediately covered by the dollar’s strong ascent. This strong surge ran parallel to the Fed’s gentle nudges of the continuation of rate hikes during the Jackson Hole Symposium, with chair Powell assuring the markets that the cessation of interest rates will come after the 2-year long inflation loosens its grip on the economy. The markets are expecting an 80% probability that the Feds will pause rate hikes in the next Federal Funds Rate announcement, and a close to 90% probability that the year will end with interest rates between the 550-575 range. Apart from the Symposium, the other dollar surge experienced in the week was primarily caused by the lower-than-expected unemployment claims, at 9,000 claims lower than market expectations. Drawdowns can be linked to lower-than-expected PMI levels and UofM’s consumer sentiment survey. This week, the markets are keeping their eyes peeled ahead of a wave of economic data including NFP and Unemployment rate, expecting great volatility in the movement of the dollar.
2. The euro was hit by a flurry of currency-depreciating news last week, ending below $1.08 against the dollar. While results of a stronger current account initially pushed the currency upward, a weaker-than-anticipated French, German and overall flash services PMI ultimately caused the currency to slide. The drop was worsened by European Consumer Confidence recorded at -16, as well as German ifo Business Climate figures at a strikingly lower level than previously forecasted. In amalgamation, these figures point towards a worsening economic climate for the European region, and as ECB President Lagarde hints to the looming rate cuts ahead of deflationary pressures, we can expect the euro to continue its downward trend in the mid term.
3.The pound had a similar performance as the Euro last week, tumbling close to 2% against the dollar before ending the week at $1.26. The fall in the pound can be attributed to a lower than anticipated Flash Manufacturing PMI and Flash Services PMI level, along with a significant decrease in the Confederation of British Industry’s Realised Sales figure from the previous period of -25 to -44. This week, the lack of economic data releases will likely cause the sterling to remain stagnant, with potential price movements driven by other currency majors.
4. Yen’s tumultuous performance in the previous week led to it closing at a 9-month high of 146 against the dollar, despite a lack of economic data releases in the period. The key reason for the significant outflow of the yen to other currency majors was due to the sudden spike in the US treasury bonds, proving attractive for market players and causing investors to promptly engage in swift tactical asset allocation and changing their yen to dollars. This week, the markets await the releases of key economic data such as Japanese unemployment rate and consumer confidence figures. BOJ Gov Ueda is also poised to give his speech at the Jackson Hole Symposium, which could give investors a greater insight into further developments in Japan’s key monetary policy decisions.
5. The loonie extended its losses against the dollar, rising above 1.36 last week, upon weakness within retail spendings. While retail sales m/m surprised estimates at 0.1% growth, the growth was spurred by surge in prices amongst the automobile sector, rather than consumer demand as it is revealed that retail volume dropped by 0.2%. This feeds into the narrative of a pause in BoC’s rate hike regime as retail sales information was one of the main driving factors of sustained monetary tightening. Moving forward, markets await GDP m/m figures, with estimates expecting a contraction of 0.2%. The Aussie fell flat against the dollar, ending at $0.64 last week, as markets await upcoming CPI y/y figures. Last week, China shocked markets as it delivered a 10 bps cut to its 1 year Loan Prime Rate(LPR) and left its 5 year LPR unchanged, where most are estimated deeper cuts. Such deviance from market expectations piles onto the ballooning concerns over China’s real estate development and its economic growth. Australia’s economy suffers from China’s slowdown since it relies significantly on Chinese imports of precious metal ores. Hence, the price of aussie remained subdued. This week, markets anticipate RBA Governor-designation Bullock speech and CPI y/y, which is forecasted to be at 5.2%, to gain further insights in RBA’s future policy decisions. The kiwi weakened against the dollar, closing at $0.59 last week, upon poor retail sales q/q figures. Retail sales q/q reported contraction of 1.0% as compared to 0.4% as forecasted. Such figures demonstrate weakness in consumer spending, predominantly within the food and beverages sector. However, such news is welcomed by RBNZ’s Governor Orr as he expects to see “subdued consumer spending, business investment and government constraints on spending” as part of curbing inflation. This week, markets await ANZ business confidence data to ascertain business sentiments.
6. Supported by deterioration within the US business sector, gold’s safe-haven quality shone brightly amidst market watchers and ended the week above $1910 an ounce, demonstrating gains after 3 consecutive weeks of decline. However, Fed Chair Powell’s cautious approach towards inflation and perceived propensity towards further rate hikes resulted in strength in the dollar, which pared some gains achieved during the first half of last week. A slew of economic data is due next week and we can expect gold prices to react positively if important economic indicators like Prelim GDP q/q and Non-Farm Payrolls demonstrate weakness within the economy.
