Weekly Market Update 4 September – Dollar Is Here to Stay; Surges Above 104.2 Despite String of Negative Economic News

Weekly Market Update 4 September – Dollar Is Here to Stay; Surges Above 104.2 Despite String of Negative Economic News

1. The dollar’s siege against its G10 peers faced retaliation upon worse-than-expected prelim GDP, JOLTS and consumer confidence figures but eventual non-farm payroll and PMI data reinforced the dollar’s defence to close the week slightly up above 104.2. On Tuesday, census on housing market revealed better-than-expected home prices, albeit within contractionary zones. However, the gains were quickly reversed upon negative consumer sentiment and JOLTS figures, which unveiled vacancy decline to 8.83M in July. Quits rate trended lower, implying drop in employee’s job security confidence. Private employment growth fell to 177K, coupled with Friday’s unemployment rate and average hourly earnings figures of 3.8% and 0.2%, all of which meant that the US labour market is cooling more than market’s expectations. Furthermore, a downward revision as revealed within the prelim GDP q/q, builds narrative for Fed to pause rates in the upcoming FOMC meeting. Ultimately, improving manufacturing conditions as shown on Friday’s ISM statistics catalysed dollar rise amidst conflicting NFP figures. However, markets should bear in mind that manufacturing conditions remain subdued for 9-month straight with no major improvements, corrections within dollar strength are highly likely moving into this week as markets get carried away with excess optimism surrounding a possible “soft-landing”. This week, markets await ISM services PMI and unemployment claims to affirm their beliefs on underlying economic and labour market strength.

2. Last week, the euro closed weaker below $1.08 against the dollar as market confidence in the ECB’s monetary stance weakened further upon elevated CPI and contractionary PMI levels. Germany’s prelim CPI m/m came in as estimated at 0.3% growth while Spain’s flash CPI y/y came in above market’s forecast at 2.6% growth. Elevated level of inflation reported within eurozone economies manifested itself as eurozone CPI flash estimate reported 5.3% growth y/y, above estimates of 5.1%. As manufacturing PMI across eurozone economies showed contractionary numbers, the significance of these results compounded, producing volatility for the euro as doubts about the ECB’s ability to raise rates without endangering its economy surfaced. This week, markets anticipate release of services PMI and ECB’s president Lagarde speech to assess the situation within Europe.

3. A lack of major economic events led the pound sterling to remain flat at level slightly below $1.26 against the dollar. However, an honourable mention to note would be BOE’s chief economist, Huw Pill’s speech on interest rate decisions. He mentions the risks of further rate hikes, in an attempt to achieve inflation below 5% by year end 2023, on employment and growth. He reiterates caution with future interest rates decisions as it is now in “restrictive territory”. This week, final services PMI and monetary policy report hearings will provide the market with hints on BOE’s monetary policy.

4. Yen strengthened against the dollar, closing at 146.2 last week, as retail sales y/y surged beyond market’s expectations, revealing underlying domestic demand. On Monday, Japan’s unemployment rate came in worse than estimated at 2.7%, this obligates the BOJ to maintain its loose monetary policy to stimulate its economy. However, yen’s strength in the past week is attributable to better-than-expected retail sales y/y figures, which came in at 6.8% growth, higher than the 5.5% as expected. While US’s improved PMI data reversed most of the yen’s gain, this sets expectations that inflation may soon become sustainable, one that is driven by domestic demand rather than supply-side constraints, leading to abolishment of YCC, strengthening the yen against the dollar. This week, markets await earnings and GDP figures to assess Japan’s economic resilience.

5. The aussie strengthened against the dollar last week, ending the week at $0.65. This ascent came after private capital expenditure beat estimates by close to 1.7%, alongside a 0.5% increase in m/m retail sales in the country. While y/y CPI showed a decrease from the previous month, it had little impact on the currency as the RBA is expected this week to keep cash rates constant at 4.1%, reasoning how the 11-year high borrowing costs must continue to slow demand for goods and services. The performance of the kiwi was synonymous to the aussie, with the currency near the 0.60 levels. This comes after economic business confidence rose over 9% since the last period, highlighting a growing optimism in the economy amongst key agricultural and manufacturing businesses. Conversely, the loonie saw a sharp appreciation against the dollar, before weakening near market close for the week and ending off at 1.36. This is despite current account figures substantially beating market estimates by close to 5 billion, with all eyes of the markets choosing instead to focus on BOC’s latest overnight rate decisions in this coming week.

6. Gold rose significantly against the dollar last week, reaching as high as $1950 before descending to end the week at $1938. This came after the growing uncertainty in the dollar , caused by lower-than-expected ADP non-farm employment change, resulted in investors flocking towards the safe haven bullion. However, the metal’s ascent was met with strong resistance nearing end-week as strong US PMI figures and actual non-farm employment gains enticed the markets to divest their commodity portfolios and reinvest into the dollar, resulting in the momentary selling pressure on the bullion.

Salzworth Asset Management