- Fear of a recession is mounting as global inflation stays hot - prompting central banks to continue with their strategies to front load interest rate hikes to dampen growth and demand in an effort to control it. As many central banks have abandoned the soft-landing approach, asset volatility remains elevated.
- UK’s fiscal plans to lower taxes and cap energy costs have collided with monetary initiatives. Since the programs are unfunded, it would likely lead to increased debt issuance. This increases pressure for Bank of England (BoE) to hike rates further to offset the impact from inflation. Gilts and GBP FX price action have been extreme, causing the BoE to restart quantitative easing (QE) temporarily to control the spike in gilts' yield.
- Japan’s FX intervention from 146 to 141 has failed, but it was not a surprise as Bank of Japan (JoB) remain committed to yield curve control. Last week, JoB performed an unscheduled operation to buy 20-year Japan government bonds. When yields are artificially suppressed and inflation is high, the adjustment would have to come from a weaker yen.
Data/Events Calendar Oct 3 – 7
Monday (10/3): US manufacturing PMI, ISM, Eurozone PMI, UK Mfg PMI, Canada Mfg PMI, Tokyo CPI, Fed speak: Barkin, Williams
Tuesday (10/4): Reserve Bank of Australia rates decision, US factory orders, durable goods, JOLTS job openings, Eurozone PPI, Japan services PMI. Fed speak: Logan, Williams, Mester, Jefferson, Daly
Wednesday (10/5): ADP employment change, Services PMI, ISM, Trade balance, mortgage applications, Reserve bank of New Zealand rates decision, Eurozone services PMI, UK services PMI, Canada trade. Fed speak: Bostic
Thursday (10/6): US jobless claims, Eurozone retails sales, Canada Ivey PMI. Fed speak: Evans, Cook, Waller, Mester
Friday (10/7): US employment report, Canadian employment report. Fed: Williams
-
FX Rates
Last Week's RangeRates are not real time. Rates are today's indicative mid-market rates as of time of publishing, which may vary. Please contact SVB for a current quote.
EUR/USD 0.95-0.99 GBP/USD 1.04-1.12 USD/CAD 1.36-1.38 AUD/USD 0.64-0.66 USD/JPY 143.3-144.9 USD/CNH 7.07-7.27 USD/ILS 3.49-3.58 USD/MXN 20.1-20.6 USD/CHF 0.97-1 USD/INR 81.2-82 USD/BRL 5.27-5.43 USD/SGD 1.43-1.45 USD/DKK 7.55-7.8 USD/SEK 11.1-11.5 USD/NOK 10.5-11
-
USD
- With Fed policies being data dependent, the market is now ultra-sensitive to every ounce of economic data points. This Friday’s employment report for September is expected to show a gain of 250,000 jobs with average hourly earnings estimates to stay flat at 0.3%. This data set is crucial because after raising a cumulative 3.00% this year, the Fed is emboldened to tighten further as they view labor market conditions are still tight and consumer demand has been resilient.
- Fed speak will likely stay hawkish as there is no real incentive to deviate from course. The PCE deflator, Fed’s preferred inflation measure, remains elevated (core PCE 5.00%) while personal spending improved in August. There is the believe that the strategy to quickly raise rates and lower demand to hold off inflation may only be in mid stages of the cycle.
- Cleveland Fed’s Loretta Mester (voter) commented that she favored the fight against inflation even if it may lead to a recession. Mester added that her terminal rate was higher than the Dot Plot’s 4.40%. Currently, Fed fund futures have 4.50% priced in by Q2 2023 and for the Fed to ease rates in Q4 2023. This timeline for the Fed’s pivot is quite ambitious, but if inflation does not subside the terminal rate may need to move higher.
- The USD index (DXY) climbed 6.5% from mid-September before easing -2.7% toward the end of the month. Overbought conditions, month-end rebalancing flow and intervention from other central banks were the catalyst behind the extreme moves in FX.
GBP- Incongruent fiscal and monetary policies sent the UK’s Gilts and currency into a tail-spin last week. The Chancellor’s mini-budget of Sept 23 that included lowering taxes and spending billions to cap energy costs for households was poorly received by the market. Investors concluded that new gilts issuance would be required as those programs are not funded. This comes at a time when borrowing costs are on the rise. Due to the inflationary impact, Bank of England will need to hike rates more aggressively. Having already raised 2.00% year to date, BoE is expected to tighten by another 100 bps at the Nov 3 meeting.
- The immediate market reaction to the government’s plans saw 10-year UK gilts yields rushed up +50 bps in two days before BoE intervened to buy unlimited amounts of bonds in the long end of the curve to contain the selling frenzy. GBP/USD wasn’t spared either as it gapped -8% lower to 1.0351 on Sep 26. However, it did find support and staged a V shaped recovery to 1.1200 due partly to positioning short squeeze and reports that the Truss government had reversed plans to cut taxes for those at the highest income tax (45%) bracket after receiving backlashes from within the Conservative party.
- UK inflation is at a 3- year high (CPI 9.9% Aug), but growth seems to be sustaining with Q2 GDP surprising on the upside at 4.4% vs forecast of 2.9%. However, with traders pricing in peak rates at 5.80% by June 2023, there is a long way to go and probably more pain ahead for the UK economy.
EUR- The European Central Bank (ECB) faces numerous challenges from double digit inflation (Eurozone CPI 10% in Sept), energy crisis and war in Ukraine. Stagflation risks are heightened but ECB has already shifted to prioritizing inflation control and raised benchmark rates by a total of +125 basis points (bps) since July. With inflation still trending up, an increasing number of ECB members now expect interest rates to move higher into restrictive territory. However, the definition of “restrictive” has yet to be defined.
- Bank of Spain’s De Cos (dove) had suggested that rates may peak at 2.25-2.50% by Q1 2023. ECB’s Chief Economist Lane was also less supportive for aggressive tightening. Still, the futures market has 2.00% priced in by December and 3.00% by Q3 2023.
- EUR/USD fell -6.4% from 1.0198 on 12 Sept and to a low of 0.9536 in just two weeks. The weaker macro backdrop and USD outperformance were the main catalyst behind the move in the second half of September. Also, there are expectations that no other developed economies can withstand the series of rates tightening better than the US or be able to sustain higher terminal rates.
CAD- Canadian core inflation (core CPI common 5.7% Aug) is still uncomfortably high by Bank of Canada (BOC) standards, hence another 75 bps hike is expected for the Oct 26 meeting. Unlike the Fed, many traders expect the BOC’s terminal rate to be lower at around 4.00-4.25% which is consistent with pricing in the futures market.
- Canadian housing market data has been trending lower with the National Home Price Index (HPI) in decline for three consecutive months. Given that the housing sector is big component of the overall economy and Canadian consumers are relatively more leveraged than their US counterparts, there is the belief that the cumulative 300 bps worth of hikes so far is starting to put a dent on demand. As such, BOC may not need to match the Fed in the tightening cycle.
- This week’s Canadian Purchasing Manager Index (PMI) and jobs data will be important in helping reshape expectations for the October BOC meeting and future rates decisions. Canadian employment has always been a volatile series, but in the current data dependency environment, traders are hypersensitive for signals that could set the course for future monetary actions.
- USD/CAD has been trending higher in correlation to the broad USD rally forming a new 18-month high at 1.3938 on Sep 30. However, some are fading this move as episodes above 1.40 in recent years have been short lived.
ASIA/PACIFIC- The Indian rupee reached a record low against the greenback as the Reserve Bank of India withdrew from targeted intervention around 80.00. However, they are now concerned that FX reserves may be inadequate if there was a speculative attack on the currency. They have encouraged state enterprises to access USD credit lines instead of using the FX spot market.
- The Chinese yuan also weakened to levels not seen since 2008 against the USD. The People's Bank of China warned against directional bets on the yuan and have asked local banks to respect the daily FX fixing rates.
Performance relative to common FX Budget Rate:Average Rate for 2021 Current Spot Current Spot vs 2021 Average AUD 0.7513 0.6461 -14.0% CAD 1.2537 1.3728 -9.5% CHF 0.9143 0.9891 -8.2% CNH 6.4506 7.1159 -10.3% EUR 1.1828 0.9768 -17.4% GBP 1.3757 1.1219 -18.4% JPY 109.85 144.89 -31.9%
For more analysis on FX markets or information regarding SVB's FX services:
See all of SVB's latest FX information and commentary at www.svb.com/foreign-exchange-advisory
| Source: Bloomberg | |
This article is intended for U.S. audiences only. ©2023 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the FDIC and the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license. The views expressed in this email are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction. Foreign exchange transactions can be highly risky, and losses may occur in short periods of time if there is an adverse movement of exchange rates. Exchange rates can be highly volatile and are impacted by numerous economic, political and social factors, as well as supply and demand and governmental intervention, control and adjustments. Investments in financial instruments carry significant risk, including the possible loss of the principal amount invested. Before entering any foreign exchange transaction, you should obtain advice from your own tax, financial, legal, accounting and other advisors, and only make investment decisions on the basis of your own objectives, experience and resources. |
