- Last Friday’s strong US employment report derailed recovery in risk assets and currencies (versus the USD).
- Recessionary fears continue to dampen market sentiment as major central banks look set to continue their path of monetary tightening.
- Good news is bad news paradigm in effect. Positive outcomes for growth, employment, and housing convey Federal Reserve has not done enough to fight inflation.
- Earnings season kicks off this week in the US. Pepsi’s earnings release tomorrow will be an important proxy for strong US dollar impact on overseas business.
- Geopolitical tensions continue to drive markets, as the war in Ukraine could be set to escalate following last week’s annexations. In response to an attack on a bridge critical to supply lines, Russia ordered airstrikes on Ukrainian cities. The isolation from Russian gas due to the closure of the Nord Stream pipeline has muted some volatility resulting from the conflict, however tensions continue to drive risk off sentiment globally.
Key data/events for 10.10.22 to 10.14.22
Wednesday: FOMC meeting minutes, Japan Machine Orders, UK Industrial & Manufacturing Production, UK trade balance, US MBA Mortgage Applications, US PPI, Pepsi earnings
Thursday: German CPI, US CPI, US Initial Jobless Claims, Europe trade balance, China inflation, China trade balance
Friday: French CPI, Canada Manufacturing Sales, US Retail Sales, U. of Michigan Sentiment, China economic output, big bank earnings (JP Morgan, Morgan Stanley, Wells, Citi)
With few exceptions (including Brazil, Mexico, China, and Hong Kong), all other countries have a policy interest rate that is *below* the current level of inflation. A deep negative real policy rate (policy rate minus inflation) has been associated with central bank complacency in fighting inflation, and this has been a key driver of currency weakness in 2022.
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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 0.97-1 GBP/USD 1.11-1.15 USD/CAD 1.35-1.38 AUD/USD 0.64-0.65 USD/JPY 143.5-145.4 USD/CNH 7.01-7.16 USD/ILS 3.5-3.62 USD/MXN 19.9-20.2 USD/CHF 0.98-1 USD/INR 81.4-82.4 USD/BRL 5.11-5.42 USD/SGD 1.42-1.44 USD/DKK 7.44-7.65 USD/SEK 10.8-11.2 USD/NOK 10.4-10.9
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USD
- Last Friday’s jobs report for September fell just short of expectations. However, the unemployment rate fell to historic lows of 3.5% versus a consensus of 3.7%. The dataset indicates a robust labor market and supports the current base case of a 75-bps hike to the Federal Funds rate at the November 2 meeting.
- FOMC minutes release on Wednesday from Sept. 20-21 meeting will be examined by market participants for additional insight into the future path of monetary policy and the committee's view of the economy.
- US CPI headlines the economic calendar this week. The September figures due Wednesday are expected to decelerate slightly, which is unlikely to give policy makers any reason to change their current course, which sees interest rates peaking around 4.6% in spring 2023.
- The OPEC+ decision last week to cut oil production could stoke inflation further through October, however, is unlikely to reflect in September’s.
GBP- The head of UK Treasury, Kwasi Kwarteng, announced that he will supplement his ‘mini-budget’ at the end of October. The new plan is expected to bring a more measured plan, with a focus on balancing the books.
- Since 28 September the Bank of England has been buying up to £5 billion of long-dated gilts daily. As the gilt-buying program enters its final week, the BoE stated it will increase the limit to £10 billion per day to stabilize debt markets.
- The pound has erased any gains made last week, which saw it rise back to pre-budget levels above GBP/USD 1.14. Any meaningful rallies appear short-lived as investor confidence remains shaky.
- UK unemployment fell to the lowest level since 1974, with 3.5% of the workforce currently without a job. The figures have added to concerns of labor shortages, which saw a small sterling sell-off in response. The number can be partially attributed to participants dropping out of the workforce at a record rate.
- This week’s economic releases for the UK cover the August period, offering little insight into the impact of the turmoil that gripped UK debt and FX markets towards the end of September.
EUR- Italy’s new government headed by Giorgia Meloni’s right-wing coalition is due to send a draft budget to the European Union this week. Markets are on edge following the fallout from the UK’s fiscal policy last month and fear a repeat in debt-stricken Italy.
- Last week Germany received criticism regarding their €200 billion national energy aid plan that could trigger economic imbalances within the European Union. Now, Germany has changed its stance towards the joint issuance of EU debt which could cushion the blow of the energy crises by allowing funds to be dispersed to struggling member states as loans.
- The euro slipped towards 97 against the dollar through Monday, following escalating tensions in Ukraine. Eurozone Aggregate PMIs printed marginally below forecasts, all in contractionary territory. Manufacturing PMI came in at 48.4 and Services PMI at 48.8.
CAD- The Canadian dollar has become the best performing G10 currency against the greenback through 2022. It is down 7.81% against the US dollar, trading at 1.37, significantly outperforming the Japanese yen and British pound. The relative strength has been boosted by the Bank of Canada’s insistence to keep pace with the Federal reserve delivering an overall 3% rise to is benchmark rate since March 2022. Additionally, Canada benefits from isolationism from European conflict and energy exports, bolstering the Canadian dollar.
- Manufacturing Sales, to be released Friday, are expected to slip further as quantitative tightening, energy costs and global economic uncertainty weigh on economic output.
ASIA/PACIFIC- The US has escalated the technological trade war with China. The Biden administration implemented fresh sanctions to squeeze the supply of high-end semiconductors and computer chips. This could hinder both Chinese economic prosperity and limit military development.
- China’s economic growth rate this year is set to fall behind the rest of Asia for the first time since 1990. China’s determination to adhere to it zero-COVID policy has weighed on growth, however fears are mounting that the hinderances arise from structural issues in the property market and local government finances. The world bank has forecasted that China’s yearly growth will finish at 2.8%, a long way from Beijing’s official target of 5.5%.
Performance relative to common FX Budget Rate:Average Rate for 2021 Current Spot Current Spot vs 2021 Average AUD 0.7513 0.6287 -16.3% CAD 1.2537 1.3793 -10.0% CHF 0.9143 0.9983 -9.2% CNH 6.4506 7.1667 -11.1% EUR 1.1828 0.9708 -17.9% GBP 1.3757 1.1068 -19.5% JPY 109.85 145.69 -32.6%
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 | |
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