Weekly Market Update 9 December – Dollar ended the week marginally higher at 104.9 after hot inflation data confounded market expectations

Weekly Market Update 9 December – – Dollar ended the week marginally higher at 104.9 after hot inflation data confounded market expectations

1. Dollar ended the week marginally higher at 104.9 compared to 104.5 at the start of the week, appearing to stall the sharp bearish declines seen in the past months. From Monday, the Dollar began to rise as upbeat economic data paved the way for a less negative outlook on the US economy after weeks of gloomy predictions. Although ISM Manufacturing PMI dipped into contractionary levels in data released last week, ISM Services PMI exceeded market expectations of 53.5 to come in at 56.5 in data released this week, and has remained firmly above 50 since dipping into contractionary levels in May 2020. Unemployment claims of 230k were aligned with market expectations, and still showed no concrete signs of a worsening employment outlook, having declined and stabilised at pre-pandemic levels since the beginning of this year, after peaking at 6648k in April 2020. The Greenback was further buoyed by the latest Core PPI m/m data of 0.4% which was double market expectations, while PPI m/m of 0.3% was also higher than market expectations of 0.2%. As the change in the price of finished goods and services sold by producers, PPI data is a leading indicator of inflation in the US. The latest PPI figures indicate that inflation is still growing at a steady rate, and faster than what investors had anticipated. Indeed the more than 8% drop in the Dollar from a 20-year high of 114.78 on September 28 could be a reflection of overselling, as investors overestimated how fast inflation was likely to drop. Although still overall bearish next year, the Bank of America believes that the market has run ahead of itself. This could be because investors expect price pressures to ease faster than the Fed, which could result in a stronger Dollar in Q1 when the market corrects itself. In the coming Wednesday, the Fed is widely expected to increase its benchmark rate by 50 bps, the first downshift after four consecutive 75 bps hikes. Economists surveyed by Bloomberg say that the Fed is likely to hike rates by another 50 bps in 2023, and expect to maintain that peak through all of 2023.

2. Brent Crude edged lower to $76.6 per barrel on the back of EU and G7 restrictions placed on Russian oil, the first time it has dipped below the $80 since January this year. On Monday, prices took a steep dive from $88 to $83 per barrel when the EU’s ban on Russian crude oil took effect, which will be expanded to refined petroleum products from 5 February 2023. In addition, the EU has also prohibited the related provision of technical assistance, brokering services or financing or financial assistance of tankers carrying Russian oil. These restrictions were also adopted by Australia and the G7, and will only apply for cargoes of Russian crude unless it is sold for less than US$60 a barrel, which includes a mechanism to keep the price cap at least 5% below the market rate. Given that the majority of Russian oil transported to the EU is seaborne, 90% of Russian oil exports to Europe are expected to be covered by the restrictions. This could significantly push down the price of oil not just in the EU, but in alternative markets where Russian oil could be sold at a discount, given that Russia contributes the third largest share of global oil production. Expectations of a Greenback rebound in Q1 2023 will make the Dollar denominated commodity more expensive, further reducing demand and weighing down prices in the medium term even for countries that do not abide by the $60 price cap. However, President Putin has warned that Russia would retaliate by cutting oil production and refusing to sell oil entirely to any country which abides by the price cap. As India and China continue on their trend to surpass Europe as Russia’s biggest customers, the price cap may also have a muted effect on overall global oil prices. The rollback of some Covid-19 restrictions in China could pave the way for further easing, prompting anticipations for a rebound in consumer demand that could also boost demand for oil as its economy picks up. Given that its economy has been fundamentally hobbled from such a long period of Zero Covid and a significant proportion of Chinese remain unvaccinated however, a rapid bounceback in demand akin to what the West experienced when it reopened should not be expected. In the coming weeks, investors should pay keen attention to price action in oil markets which will be driven by the extent to which Moscow will officially retaliate to the price cap, and as well as whether China’s surge in Covid-19 cases will prompt the regime to reverse easing. Meanwhile Gold extended its rally to $1797 per ounce by the week’s end, but could see headwinds in the coming weeks as the Dollar temporarily picks up.

3. Commodity currencies experienced a sharp dip on Monday following the surge in the Dollar on the same day. While Loonie continued to decline to 0.73, Aussie and Kiwi pared losses by the week’s end to close at 0.68 and 0.64 against the Dollar respectively. On Tuesday, the RBA announced a 25 bps rate hike to a benchmark rate of 3.10%, and also bumped the interest rate on Exchange Settlement balances by 25 bps to 3.00%. The RBA’s rate hike was already widely expected by the market and was factored into prices beforehand. However, hawkish statements from the RBA announced on Tuesday could further bolster the Aussie’s bullish trend. The Board expects further rate hikes in the period ahead with inflation forecasted to peak at 8% before declining from next year onwards to 3% over 2024. Given that this was the RBA’s own prediction, investors should expect interest rates to follow a similar trend as the central bank adapts its monetary policy to evolving data. Australia also experienced steady q/q GDP growth of 0.6% in recent data, which could boost the Aussie further. Unlike its European counterparts, Australia’s demand driven inflation is a reflection of an upbeat economy and tight labour market, which is less fragile to damage and emboldens the RBA to make further rate hikes. Meanwhile the Loonie’s decline can be largely attributed to the plummeting prices of oil. As the 5th largest global oil producer, the price of oil in Canada’s export oriented economy is closely correlated with the value of its currency as lower oil prices work against its balance of trade. On Wednesday the BoC delivered its 7th rate of 0.50% to 4.25%, its highest overnight rate since early 2008, but did little to save the Loonie from its bearish decline. The market expects the BoC to soften and even reverse its rate hikes in the year ahead, which could weigh the Loonie down further. Investors should anticipate the BoC’s next interest rate announcement scheduled for 25 January 2023.