Weekly Market Update 28 October – Downside risks seen in Dollar amidst mixed economic indicators
Weekly Market Update 28 October – Downside risks seen in Dollar amidst mixed economic indicators
1. The Dollar fell to a one-month low below 110 on Thursday but pared some losses upon news that the estimated GDP growth for 2022 was at a healthy level of 2.6%. However, the Dollar steadied at around 110.4 on Friday and is still set to decline for the second straight week as bets were placed on a less hawkish Fed. Flash services PMI in October was below 50 at 44.6 for the fourth month in a row, performing worse than market expectations of 49.6. Similarly, flash manufacturing PMI extended its steady decline to 49.5, dipping below the level 50 mark for the first time in over 2 years and lower than market expectations of 51. Recent data from the US Conference Board also showed that consumer confidence, their assessment of the current situation, and short-term outlook have all worsened. Although 603k new home sales beat market expectations of 579k for the month, pending home sales which is an indicator of future sales has once again remained contractionary at -2% in line with a declining trend of new home sales since April 2021. The slew of recent data strongly suggests that business activity in the near future is at increased risk of contraction and that a demand slump is approaching the horizon, contributing to mounting evidence that inflation could ease in the coming months. Indeed while the advanced GDP Price Index; which is an indicator of changes to inflation, remained positive at 4.1%, it fell for the first time since 2020 to a significantly greater extent than market expectations of 5.3%. Although inflation has so far remained stubbornly above Fed’s target of 2%, signs that the economy is cooling eases pressure on the Fed for future rate hikes in the new year which could turn the tide on the Greenback’s ascent.
2. The Euro pared recent losses to peak just above parity with the Dollar, closely following the greenback’s dip. The Euro subsequently stabilised below parity to hover around 0.995 over the weekend. ECB board members reaffirmed their commitment to rein in inflation through rate hikes, and increased rates by 75bps to the highest since 2009 during its October meeting on Thursday, following a similar move in September. However, the ECB also vowed to continue its quantitative easing programme where new money is created to buy bonds, which could limit the Euro’s upside in the coming weeks. Meanwhile, Pound edged higher against the greenback, as markets welcomed news that Rishi Sunak had been appointed prime minister. While the UK economy expanded by 0.2% in the second quarter, recent data released on Friday indicated a sharp slowdown in spending for September. At the same time inflation has risen to over 10%, further squeezing consumer spending and increasing fears of a looming recession which could dampen the Pound’s appeal, following its rebound from historic lows of 1.07 last month.
3. The Aussie rallied over the week to peak at 0.648 against the Dollar on Thursday, before plunging to 0.641 over the weekend following a sharp drop in iron ore prices on Friday. Iron ore is a key ingredient in Chinese steel manufacturing, which saw exports of the metal fell by 20% in September from the previous month. Australia’s iron ore export dependent economy could see further headwinds as demand from its largest trading partner dwindles, amidst China’s property crisis and a tightening zero covid policy. In the coming week, markets expect RBA to deliver its seventh consecutive rate hike by 25bps on Tuesday, following a hot inflationary environment that saw September quarter consumer prices rise to a 32-year high of 7.3%. Meanwhile, the Loonie dipped on Thursday after the BoC delivered a smaller-than-expected rate hike of 50bps, defying market expectations of a 75bps rate hike. The central bank stated that it was nearing the end of its historic tightening campaign amidst fears that the Canadian economy could stall over the next three quarters, which could see a further decline in the Loonie in the coming months.
4. Brent crude prices extended its week-on-week gains after dipping to a low of 82.8 last month, reaching $96.2 per barrel by Friday as the recent Dollar’s weakness boosted demand for the dollar-denominated commodity. Despite a rise in US Crude Oil inventories with recent data showing a 2.6M increase, an optimistic demand outlook supported oil prices as recent data showed that the US hit a record amount of oil exports last week at 11.4M barrels per day. Similarly, Gold prices pared recent losses after declines in the Dollar and Treasury yields drove up its value, steadying above $1,660 per ounce on Friday.
