Weekly market update 7th October – Dollar extended its rally on upbeat Nonfarm Payroll data, CPI, Retail sales data and FOMC minutes in focus this week
Weekly market update 7th October – Dollar extended its rally on upbeat Nonfarm Payroll data, CPI, Retail sales data and FOMC minutes in focus this week
1. Dollar extended its rally to 112 on Friday after upbeat Nonfarm Payroll data cemented expectations for further Fed rate hikes. The nonfarm payrolls report showed that the US economy added 263,000 jobs in September, above expectations of 250,000, while the unemployment rate edged down to 3.5 percent. Fed rate hikes are also showing no signs of abating with interest rates in December projected to reach 4.4%, exceeding projections made in June of 3.4%. Both ISM services and manufacturing PMI are positive, indicating a net expansion of industry, with services PMI at 56.7 beating expectations of 56.0. Strong demand-side growth coupled with the global energy crisis are likely to continue enforcing inflationary pressure. Speeches from Fed members reiterated the current priority of stable prices, reiterating commitment to bring down inflation at all cost, indicating an overall hawkish stance which could support the Dollar’s rally. In the coming week, investors will be keeping a close watch on FOMC minutes, inflation and retail sales data for more insights on the economy’s health and Fed’s rate hike path.
2. The Euro maintained its value against the greenback, trading below parity level at 0.98, retreating from a high of 1.00 on Tuesday. Disruptions to energy supplies have continued to drive supply-side inflationary pressure in the Eurozone, with the destruction of the Nord Stream Pipeline which was Russia’s largest gas pipeline to Europe. With winter approaching, supply-side constraints and limited storage facilities are adding on to the bleak Eurozone’s outlook. Rising price pressures remain in the spotlight, as ECB Governing Council recently announced further interest rates hikes in the medium-term to stabilise inflation at its goal of 2%, following a 75 basis point interest rate hike in September. Despite this, declining growth rate forecasts of 3.1% in 2022, 0.9% in 2023 and 1.9% in 2024, and the risks of stagflation that accompany a stark economic outlook are likely to dampen the upside value of the Euro. Changes to interest rates will follow a meeting-by-meeting approach according to ECB President Christine Lagarde. Looking ahead, the next meeting of the Governing Council of the ECB will be on 27 October which will be immediately followed by a new round of announcements at a press conference. Similarly, the British Pound recovered to a high of 1.15 on Tuesday before paring gains to trade at around 1.11 on Friday on the back of a stronger Dollar following robust US jobs data. The currency saw an initial plunge to a 37-year low of 1.03 after Liz Truss’ government announced a major reversal of its tax cuts policy, leading to BoE’s intervention in the bond market. Investors will also be keeping a close watch on the next BoE monetary policy meeting on 3 November with markets anticipating an increase of 50 to 75 basis points by the end of the year.
3. The downside trend of commodity currencies have plateaued against the Dollar as recent announcements by OPEC+, RBA and RBNZ have countered downward pressure from a stronger Dollar. The RBNZ increased interest rates from 3.0% to 3.5%, in line with market expectations, while the RBA delivered a smaller-than-expected 25bps hike from 2.35% to 2.6%, defying market expectations for a 50 bps hike, as both central banks seek to control rising levels of inflation. Elsewhere, rising oil prices with Canada being a major exporter of oil buoyed demand for the Loonie as it held its gains against the greenback. The recent production cuts by OPEC+ which have led to a 1.5% hike in the price of oil alongside falling US oil inventories could buoy further demand for the Loonie. Hawkish signals from BoC which has made clear that it will not be pivoting from its current rapid pace of interest rate hikes alongside a robust labour market, with unemployment rate at a record low of 5.2% could support the Loonie’s strength.
4. Gold prices pared recent losses to reach a month’s high of $1726 an ounce on Tuesday, before falling just below $1700 an ounce by the end of the week, extending its downside trend since March. Demand for Gold faced stiff competition against increasingly attractive Treasury yields that have continued to rise. Despite a climate of inflation that makes Gold an attractive hedge against rising prices, a hawkish Fed that expects to hike rate to 4.4% in December and the Dollar’s rally have dampened the non-yielding asset’s appeal. Moving forward, Gold prices are set to make the biggest weekly gain since March with market expectations of a 3% recovery by the end of the week. Meanwhile, Brent crude prices have experienced a significant 1.5% hike to more than $93 a barrel since OPEC+ announcement on Wednesday of its plans to slash oil production by 2 million barrels per day, marking the biggest cut since the start of the pandemic.
