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    • Foreign Exchange Advisory
    • FX Update

    FX Update: Week of August 29 – Dollar up as Fed warns the inflation fight will hit growth and jobs

    Peter Compton Headshot
    Peter Compton
    • August 29, 2022

    Powell’s speech at the Jackson Hole symposium was short and borrowed heavily from historical lessons all of which reinforced the Fed's need to act decisively now. 

    • Dollar gains after Powell’s speech were muted as FX markets return to watching data and Fed speakers
    • British pound seems likely to test July lows
    • Euro remains weak on high cost of winter energy storage
    • Loonie benefits from oil hovering near $100/bbl


    Notable Economic Data/Events this Week:

    Tuesday:  Japan Industrial Production for July

    Wednesday: June GDP for Canada, US August ADP Employment Change, Eurozone CPI for August

    Thursday:  US ISM Manufacturing for August, US Construction spending for July

    The Fed Funds rate started the year at essentially zero. FOMC voting members forecast the Fed Funds rate somewhere between 3.75% and 4% by year end.  Does it matter if the September rate increase is 50 or 75bps? Only if the Fed eventually raises rates well beyond 4%.

    • FX Rates
      Last Week's Range

      Rates 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 0.99-1.00
      GBP/USD1.17-1.19
      USD/CAD1.23-1.31
      AUD/USD0.68-0.70
      USD/JPY136-138
      USD/CNH6.83-6.90
      USD/ILS3.24-3.30
      USD/MXN19.8-20.3
      USD/CHF 0.96-0.97
      USD/INR79-80
      USD/BRL5.06-5.20
      USD/SGD1.39-1.40
      USD/DKK7.37-7.51
      USD/SEK10.48-10.78
      USD/NOK9.57-9.89

    • USD

      Friday’s release of Core PCE Deflator for July was +4.6% YoY vs. forecast of 4.7% and prior month’s 4.8%. The Fed welcomed the reduction in its favored inflation measure but quickly added that one data point does not make a trend. The dollar ended trading stronger by end of day Friday but failed to reach Tuesday’s highs.

      With 4% Fed Funds now priced into FX rates it may take an exogenous shock or an even more aggressive Fed to drive the dollar higher.

      GBP

      In March 2020, when the initial panic of the COVID pandemic hit, the pound traded at a low of 1.1555 to the US dollar. This morning GBP trades at 1.1708 which is the weakest since the pandemic lows. The Bank of England was the first central bank to openly forecast a recession that would last five quarters.  Uncertainty on three levels may contribute to further pound weakness: lingering Brexit concerns, political shocks and winter fuel costs.

      EUR

      Last week the euro traded at its lowest level since 2002 but then gained after comments from European Central Bank officials that a rise of 0.75% in the benchmark interest rate may be necessary. This Wednesday’s August CPI data carries a 9% forecast thereby providing the last key data point before next week’s ECB meeting (September 9). Read Here in SVB’s FX Quarterly Outlook about factors driving the euro to parity with the dollar.

      The Russian/Ukraine war is felt globally but carries a potentially greater disruption to the European economy especially with regard to energy supplies. Both sides of the war are digging in for prolonged fighting likely resulting in continued pressure on the euro.

      CAD

      The Canadian dollar sits above the 1.30 level as FX markets see the Fed remaining more aggressive than the Bank of Canada. Powell warned of “below trend growth and softer labor markets” but intends to raise rates in the US anyway. Wednesday’s Canadian GDP may help inform the Bank of Canada’s next rate increase when it meets September 7.  See table below showing how the loonie has fared better than other currencies relative to FX Budget Rates.  The price of oil held up last week after Saudi Arabia warned production cuts may be necessary. OPEC has coalesced around $100/bbl oil whether Iran gets a nuclear deal or not.

      ASIA/PACIFIC

      The Japanese yen continues to trade at levels last seen in the late 1990s.  Despite Tokyo’s CPI data for August hitting 2.9% (up from 0.6% in January) the Bank of Japan is expected to stick to its highly accommodative monetary policy. Japan’s central bank’s benchmark interest rate is set at 0.1% with most other central banks raising rates putting constant pressure on the yen. Japan’s inflation is caused mostly by energy, commodity prices and the weak yen – all of which are considered by Bank of Japan to be temporary. Until inflation begins to show up in wage increases, the Bank of Japan is unlikely to raise rates and the yen is unlikely to see sustainable gains.

      Performance relative to common FX Budget Rate:
        Average Rate  Current Current spot vs.
        vs. USD for 2021 Spot    2021 Average
      AUD 0.7513 0.6905 -8.1%
      CAD 1.2537 1.3017 -3.8%
      CHF 0.9143 0.9671 -5.8%
      CNH 6.4506 6.9088 -7.1%
      EUR 1.1828 1.0013 -15.3%
      GBP 1.3757 1.172 -14.8%
      JPY 109.85 138.43 -26.0%
    Contact Us

    For more analysis on FX markets or information regarding SVB's FX services:

    Contact your respective SVB FX Advisor or the SVB FX Advisory Team at GroupFXRiskAdvisory@svb.com.
    See all of SVB's latest FX information and commentary at www.svb.com/foreign-exchange-advisory

    Subscribe to receive FX updates to your inbox.


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     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.

    Peter Compton
    WRITTEN BY
    Peter Compton
    • View Author Profile
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