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Weekly Market Update 5th August – Dollar marched higher with previous week’s interest rate hike, with no sign of easing monetary policy

Weekly Market Update 5th August – Dollar marched higher with previous week’s interest rate hike, with no sign of easing monetary policy

1. The Dollar index rose after hitting a 4 week low of 105, ending the week close to 107, as the previous announcement of the 75 bps interest rate hike took effect. Interest rate hikes no longer produce the same drastic impacts as before, with all nations tightening their monetary policy to rein in inflation. The Fed has settled their tightening cycle at 3.25 – 3.50% for this year, with no intentions of easing the tightening cycle next year. July ISM Manufacturing index fell to 52.8 from 53.0 in June, less than the expected index of 52.3 while still implying a slowing manufacturing sector ahead. Meanwhile, ISM Services PMI rose from 55.3 to 56.7. Robust US jobs report continued to exceed market expectations, buoyed by non-farm payrolls rising to 528k, above the expected 250k, together with the unemployment rate falling to its lowest of 3.5% in 2 years. Notable publications in the coming week include CPI and consumer sentiment data.

2. Euro extended its decline against the greenback, trading near 1.012 levels as the currency remains at the mercy of soaring natural gas prices with the Russian ban and supply constraints. On the data front, the unemployment rate remained at an unchanged record low of 6.6%, but the number of job seekers increased by 25,000. Disappointing PMI and Retail Sales data continue to weigh on recessionary concerns. Eurozone Manufacturing PMI fell to a 25 month low of 49.8 compared to the previous 52.1, signifying contraction in the manufacturing sector. Elsewhere, Sterling weakened to around $1.20 after delivering its expected 50 bps rate hike on Thursday, bringing interest rates up to 1.75%, the biggest increase in 25 years. With both Final Services and Manufacturing PMI falling this month, together with inflation expected to hit 13.3% by October, the BoE policy rate shifting to 2.25% in September are still in the talks. In the coming week, investors will be keeping a close watch on the release of GDP figures.

3. Commodity currencies generally underperformed and fell short against the greenback. The Aussie weakened past $0.69 level at the end of the week after retreating from 6 week highs, after the RBA raised its cash rate by 50 bps to 1.85% as widely anticipated. RBA expects inflation to peak at 7.75% later in the year, with the economy’s projected growth at 3.25%, lower than previous forecasts of 4.2%. Kiwi held below the $0.622 level this week, with unemployment rate rising from 3.2% to 3.3%. RBNZ remains widely expected to raise interest rates by 50 bps during the next meeting on August 17. Likewise, the Loonie fell to a 5 week low below $0.77, driven by the strengthening Dollar. Unemployment fell to 4.9% but employment numbers fell by 30.6k jobs.

4. WTI crude futures extended its decline to a 6 month low of $87.5, ending the week at $89 per barrel on Friday, buoyed by recessionary concerns. China – Taiwan tensions brought about by US House Speaker Nancy Pelosi’s visit to Taiwan together with the slowdown fears dimmed the demand outlook for oil. On the other hand, gold prices maintained its overall strength at the $1775 per ounce level amid the Dollar’s strength and booming Treasury yields. High inflation expected in the coming week, coupled with concerns about global economic slowdown could limit the downside of gold, which is often seen as a traditional hedge against inflation and uncertainties.

Salzworth Asset Management