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Weekly Market Update 9 October – Dollar Pulls Back and Closes at 106.1 Amid Labour Market Moderation

Weekly Market Update 9 October – Dollar Pulls Back and Closes at 106.1 Amid Labour Market Moderation

1. Dollar halted its stampede against G20 currency peers and weakened slightly, closing at 106.1 last week upon moderation within its tight labour market sector. On Monday, ISM manufacturing PMI surges beyond estimates, reporting at 49.0, indicating stabilisation of its 11th month of contraction. While ISM services PMI beats estimates of 53.5, it fell from its previous reading of 54.5 upon contracted order growth. JOLTS job opening surged beyond estimates of 8.81M, coming in at 9.6M, reinforcing the tight US labour market. Although ADP Non-farm employment change fell drastically below estimates of 154K, NFP, on Friday, reported upside of 336K in employment, beating estimates of 171K. However, gains were quickly pared as the counterweight of moderating average hourly earnings m/m and unemployment rate data signalled weakening in US labour market. This week, markets await PPI m/m and CPI y/y news, which are forecasted to demonstrate 0.3% and 3.6% growth respectively. Consumer confidence is anticipated to have declined among consumers when the consumer sentiment survey is released later in the week.

2. The euro managed to halt its recent decline against the US dollar, closing on a positive note near the $1.06 mark, driven by a broader improvement in Purchasing Managers’ Index (PMI) data. Last week, markets observe outperformance within manufacturing and services sector, as most PMI data beat estimates, amongst euro zone economies. Furthermore, improvement in trade balance within Germany and France, the manufacturing powerhouse within Europe, indicated economic resilience for European economies. This week, markets anticipate speeches from ECB President Lagarde and final PCI readings from Germany and France to affirm effects of monetary tightening and gain insights into ECB’s rate hike cycle.

3. The pound sterling managed to stem its downward trajectory against the US dollar, concluding trading above the $1.22 level, supported by the positive development in the final services PMI. On Wednesday, the final services PMI survey exceeded expectations, recording a reading of 49.3, surpassing the estimated figure of 47.2. This improvement was accompanied by sustained optimism in business activity expectations for the upcoming year. This week, market participants are eagerly anticipating the release of GDP m/m data, which is forecasted to grow by 0.2%, and speeches by BOE Governor Bailey. These events are expected to provide valuable insights into the UK’s economic trajectory and the potential path of its future interest rate adjustments.

4. The yen strengthened against the dollar, closing at 149.30, driven by positive developments in business condition surveys and household spending that indicate a more favorable outlook for Japan’s economy. The Tankan manufacturing and non-manufacturing indices exceeded expectations, signaling improving conditions within Japan’s corporate landscape. Additionally, although household spending year-on-year remains in contractionary territory, it demonstrated an improved performance, surpassing estimates with a growth rate of -2.5%. This week, market participants are eagerly awaiting Producer Price Index (PPI) y/y data to gauge the presence of inflationary pressures within Japan’s business sector.

5. The loonie experienced a decline against the US dollar, closing above the 1.36 level. This depreciation was primarily driven by a surge in US Treasury yields resulting from the Non-Farm Payrolls (NFP) report, which overshadowed the positive PMI and labour market data from Canada. Ivey PMI exceeded expectations, registering a reading of 53.1. Furthermore, employment data revealed a significant increase in employment levels and a decrease in the unemployment rate, which now stands at 5.5%. These indicators collectively demonstrate the resilience of Canada’s labor market and may potentially lead to further tightening measures by the BOC. The aussie depreciated against the dollar, closing below $0.64, driven by the RBA’s decision to maintain interest rates for four consecutive months. While this move was broadly anticipated, it could led to an expansion in interest rate differentials when compared to the United States, where the stance has emphasized the possibility of higher rates for a more extended period. This week, market awaits results of the MI inflation expectation survey, as it provides insights into consumer expectations, which could potentially influence actual inflation trends. Similar to the aussie, the kiwi also weakened against the US dollar, closing below $0.60, as the Reserve Bank of New Zealand (RBNZ) chose to keep interest rates unchanged. Last week, the RBNZ decided to maintain the official cash rate at 5.50%, contributing to the depreciation of the New Zealand dollar.

6. In the context of expectations for “higher rates for an extended period,” the strengthening US dollar has exerted downward pressure on the attractiveness of gold. Gold prices dipped to $1829 per ounce last week. Nevertheless, there is significant upside potential due to emerging geopolitical tensions between Israel and Palestine. We anticipate gold prices to surge as capital seeks refuge in safe-haven assets, akin to the price dynamics observed during the Russia-Ukraine conflict in 2022.

Salzworth Asset Management