- FX markets continue to be driven by monetary policy and interest rate divergences. All eyes on US Consumer Price Index (CPI) on Tuesday this week.
- The central inflation fight continues with some key central banks raising rates last week: Canada +0.75% to 3.25%, European Central Bank +0.75% to +0.75%, Australia +0.50% to 2.35%
- There are reports that Ukraine has recaptured occupied territories in the East as Russian troops were ordered to withdraw, raising hopes for a ceasefire before winter – Euro and European stocks start the week strong.
Data/Events Calendar 9/12 – 9/16
Monday: Germany inflation rate, UK unemployment rate
Tuesday: US inflation rate (CPI); UK inflation rate
Wednesday: US Producer Price Index (PPI)
Thursday: US retail sales
Friday: US Univ. Of Michigan Consumer Sentiment, Italy inflation rate
Commodity prices continue to fall as we originally reported in the Q3 2022 FX Quarterly. Price reversals will contribute to a cooling of inflation in the months and quarters ahead.
Last Week's Range
EUR/USD 0.99-1.01 GBP/USD 1.14-1.16 USD/CAD 1.30-1.32 AUD/USD 0.67-0.69 USD/JPY 140-145 USD/CNH 6.90-7.00 USD/ILS 3.39-3.45 USD/MXN 19.9-20.2 USD/CHF 0.95-0.99 USD/INR 79-80 USD/BRL 5.14-5.25 USD/SGD 1.39-1.41 USD/DKK 7.3-7.5 USD/SEK 10.5-10.9 USD/NOK 9.8-10.1
Market Bias: Hawkish
- The US continues to have the highest yields across developed economies. Market expectations are for a 75 bps rate hike at the next meeting, with a terminal Fed Funds rate of 4%.
- Two-year US treasury yields, generally highly correlated to fed activity, reached their highest level of 3.57% since 2007.
Risk to Market Bias: Fed might turn less hawkish if upcoming data show signals of an economic slowdown, deteriorating employment picture or weaker inflation.GBP
Market Bias: Bearish
- Liz Truss, the new Prime Minister, plans to intervene in the energy markets by freezing energy bills at £2,500 annually until 2024. The scheme is estimated to cost approximately 6% of GDP, which would put further strain on the country’s debt-to-GDP ratio, already well above 100%.
- In the Recruitment & Employment Confederation (REC) job report, job vacancies and salaries fell in August, which are considered cooling signals for the labor market.
Risk to Market Bias: Markets expect a 0.75% hike at the next Bank of England meeting, narrowing the interest rate gap with the US. The terminal rate for policy rates is above 4%.EUR
Market Bias: Bearish
- Despite a projected 0.75% hike, policy rates in Europe are still lagging on interest rates.
- With winter approaching, the weaponizing of gas supplies by Russia is putting a tremendous strain on European economies and fueling inflation which has not yet peaked.
Risk to Market Bias: A ceasefire between Russia and Ukraine would bring down energy prices and provide much needed relief to Europe.CAD
Market Bias: Bearish
- The Canadian dollar has been generally stable versus the USD in 2022, as the Bank of Canada has kept up with the Fed on rate hikes. This may change as oil prices correct.
- The disappointing Canadian jobs report last week raised concerns about the macro landscape, tempering rate hike expectations (now 50 bps, previous 75 bps)
Risk to Market Bias: Continued volatility and uncertainty in oil and commodity markets may translate to a bid in the CAD.ASIA/PACIFIC
Market Bias: Bearish
- The yen fell to a multi-decade low against the USD due to policy and interest rate divergence between the Federal Reserve and the Bank of Japan (BoJ).
- BoJ is committed to supporting growth but unlikely to intervene with a tightening policy.
Risk to Market Bias: Central bank intervention to support the JPY, whether verbal or actual, may be adopted.CNY/CNH
Market bias: Bearish
- COVID controls, economic slowdown, and a strong USD trend weigh on the CNY, worsening the domestic sentiment and speeding up capital flight out of China.
- The People's Bank of China (PBOC) said it would reduce the foreign currency reserve requirement ratio, which was originally adopted to support RMB, suggesting Chinese officials may want to engineer a lower RMB to support exports.
Risk to Market Bias: CNY has outperformed other Asian currencies recently and its safe haven status may extend beyond the region.Commodity price performance since key dates
Since 03.16.2020 (COVID lows) 2022 year-to-date Since 02.25.2022 (Russia-Ukraine) Broad-based commodity index 90% 20% 5% Crude oil 173% 15% -5% Copper 49% -20% -20% Wheat 71% 11% 1% Corn 97% 17% 6% Lumber 54% -55% -61%
Source: Bloomberg data through 09.09.2022. BCOM is the broad-based commodity index, generic first futures prices for all other.
Rising commodity prices are central to the global inflation problem in 2022. Commodity prices are higher across the board since March 16, 2020. A broad-based commodity index has nearly doubled since that date, with oil prices’ 173% increase through September 09, 2022 leading the way.
Yet year-to-date performance shows clear signs of a reversal, especially since the start of the Russia-Ukraine war. Lumber, a commodity-market darling post-COVID, has fallen by more than half this year.
This article is intended for U.S. audiences only.
©2022 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.