Weekly Market Update 2nd September – Dollar marched higher boosted by safe-haven flow and prospects of higher interest rates
Weekly Market Update 2nd September – Dollar marched higher boosted by safe-haven flow and prospects of higher interest rates
1. The Dollar Index extended its rally, reaching 20-year highs of above the 110 level on Thursday, supported by greater consumer confidence in the economy. The Conference Board Consumer Confidence Index rose to 103.2, up from the previous 95.3, indicating a more optimistic outlook in consumer sentiment towards future prices and growth. 315k jobs were added in August, well below the 526k in July but greater than anticipated of 295k jobs, alongside the unemployment rate rising to a 6 month high of 3.7%. Meanwhile, manufacturing PMI fell to 52.8 for August but surpassed expectations of 52.1, suggesting that manufacturing activities might have peaked, which could fuel slowdown concerns. On the other hand, in response to Fed’s recent commitment to rein in inflation to fulfil their goal of bringing inflation to the 2% target, markets are anticipating a 75 bps rate hike in September, which could boost demand for the Dollar. In the coming week, investors will be looking at PMI Services data, as well as speeches by various FOMC members including Fed Chair Jerome Powell for more clues on the Fed’s moves going ahead.
2. Euro extended its decline, hovering near its 20 year low at around $0.99, while market anticipations of a more hawkish ECB did little to boost the currency. Inflation data across the Eurozone came in higher than expected, with Core CPI Flash estimates at 4.3%, up from its previous 4.0%, boosting expectations of another 75 bps rate hike next week. Intensification of the energy crisis and rising gas prices due to Russia’s halt on natural gas flows weighed on the region’s growth outlook as they are heavily reliant on energy imports. In the coming week, the ECB press conference will be held, with the release of notable publications including Services PMI, Retail Sales, Employment data. Meanwhile, the British Pound extended its 3 week decline against the strengthening greenback, hitting its lowest since March 2020, weighed down by recession concerns and political uncertainty with the upcoming elections. Forecasts of an 18% inflation peak in early 2023 have amplified concerns about the reduction in purchasing power amidst the soaring inflation. Markets are expecting BoE to proceed with the 7th consecutive rate hike, raising interest rates by 50 bps.
3. Commodity currencies generally depreciated this week, weighed down by the strong greenback. The Australian dollar fell to a 7-week low at $0.68, with China’s renewed Covid lockdowns coupled with the aggressive Fed interest rates hikes exerting pressure on commodities. Another 50 bps rate hike in September is expected to be announced by the RBA next week, with interest rate peaking at 3.85% at the start of 2023. The Canadian Dollar depreciated as well, trading at 1.31 per dollar nearing its previous high, with employment numbers falling by 30.6k jobs, instead of the expected rise of 14.2k. On the monetary policy side, the central bank is expected to deliver a 75 bps rate hike on 7th September. Kiwi depreciated to $0.61 against the greenback, as Governor Adrian Orr’s speech hinted with a more cautious tone on pushing for zero growth while still hiking interest rates. RBNZ is likely to bring interest rates up to 4.0% before pausing on rate hikes.
4. Brent Crude Oil prices fell drastically to $92 per barrel level after peaking last week, with news of the worsening oil crisis mostly attributed to supply-side issues. Markets are also keeping a close watch on the progress of nuclear deal discussion between Iran and the West, which could help to boost oil supplies if an agreement is reached. Meanwhile, Russia’s restriction on natural gas flows through a key pipeline in Germany has amplified the energy crisis, raising fears of a failing economy. Elsewhere, gold prices extended its decline to the $1700 level, the lowest in 4 weeks. However, its downside risks are limited as the bullion serves as a hedge against inflation.
