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    • Foreign Exchange Advisory
    • FX Update

    FX Update: Week of September 5 – Risk aversion helps keep dollar well bid

    Ivan Asensio, Ph.D. Headshot
    Ivan Asensio, Ph.D.
    • September 6, 2022

    Jerome Powell’s Jackson Hole speech continued to reverberate through financial markets last week.  All central banks are committed to bring down inflation with markets reevaluating the possibly interest rates will need to be pushed even higher than currently anticipated.

    • US economy added 315K jobs while unemployment rate rose unexpectedly to 3.7% from 3.5% previous. Consensus points to the Fed sticking to its aggressive policy tightening path to a +75bps interest rate hike on Sept. 21.
    • ECB may raise rate by 75bps this Thursday since European CPI hit at 9.1% last week.
    • Lower oil prices crush CAD despite Canada’s GDP up 0.1% to 3.3% during second quarter. Energy prices remain volatile especially in Europe after the G7 imposed a price cap on Russian oil price and Russia responded by closing the Nordstream pipeline. 

     

    Notable Economic Data/Events this Week:

    Wednesday: Bank of Canada rate decision, US MBA Mortgage Applications

    Thursday:  European Central Bank rate decision

    Friday:  Canada Employment data for August

    History favors the US dollar during recessions. The table at the bottom shows USD outperforming a basket of major currencies on average by 2.3%. Risk aversion and underperformance of risk assets may be contributing factors.

    • 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/USD0.99-1.01
      GBP/USD1.15-1.18
      USD/CAD1.30-1.32
      AUD/USD0.67-0.70
      USD/JPY138-140
      USD/CNH6.90-6.93
      USD/ILS3.31-3.39
      USD/MXN19.94-20.20
      USD/CHF0.96-0.99
      USD/INR79.45-80
      USD/BRL5.02-5.25
      USD/SGD1.40-1.41
      USD/DKK7.4-7.5
      USD/SEK10.6-10.8
      USD/NOK9.7-10.1

    • USD

      Market Bias: Hawkish

      • US JOLTS jobs opening and consumer confidence both beat street estimates at 11,239k and 103.2 respectively.
      • Friday’s news of softer than average hourly earnings temporarily dragged the dollar down however fresh all-time highs were made this morning
      • USD continues upward on strong economic data and safe-haven status. BBDXY was up 0.85% last week with markets expecting the Fed to keep raising rates.
      • ISM Manufacturing for August was better than expected leading FX markets to speculate if Fed has green light to raise rates aggressively supporting the greenback.
      • Risk to Market Bias: Central bank divergence turns out to be not as great as markets currently anticipate.
      GBP

      Market Bias: Weaker vs USD

      • Liz Truss becomes Prime Minister with some investors speculating her economic incentives may exacerbate inflation.
      • Sterling fell to its weakest levels vs. the US dollar since 1985 last Friday due to concerns about energy supply, politics and comparatively lower interest rates.
      • The pound has underperformed its peers as recession may be in sight due to high energy prices and inflation set to hit 14% this year.
      • Bond yields have risen sharply amid fears the new Prime Minister will be forced to borrow funds at a higher rate.
      • Risk to Market Bias: New PM in place and energy rationing is avoided while the Bank of England becomes less bearish.
      EUR

      Market Bias: Weaker vs USD

      • Eurozone CPI for August registered 9.1% with natural gas prices up 7-fold over prior year.
      • ECB meeting this Thursday with markets anticipating a 0.75% increase while ECB officials have suggested recession/increased unemployment is inevitable.
      • The Russian oil price cap and shut down of Nordsteam may lead to an even greater increase in fuel prices driving headline CPI higher.
      • German factory orders fell by 1.1% vs. a 0.5% gain expected.
      • Risk to Market Bias: Peace breaks out in Russian – Ukraine war or ECB becomes significantly more hawkish.
      CAD

      Market Bias: Weaker vs USD

      • Bank of Canada is expected to raise rates 0.50% or 0.75% tomorrow despite GDP growth to slow in H2 and in 2023.
      • West Texas Intermediate has fallen 10% since the August 30 peak as recession fears hit commodities and weaken CAD- which was off 1.4% since then.
      • Canadians have a higher level of debt compared to their counterparts in the US. The rate increases by BOC could slow down economic growth faster and weaken the loonie.
      • Risk to Bias: Higher oil prices and/or more hawkish Bank of Canada comments.
      ASIA/PACIFIC

      CNY
      Market Bias: Weaker vs USD

      • Over the bull USD cycle, CNY has outperformed other Asian currencies suggesting there is room for CNY to play catch-up to downside, especially as COVID policy lockdowns put a damper on business and the economy.
      • Chinese central bank is cutting interest rates to promote growth, a divergence from most developed and emerging economies, such that China’s yield benefit which would typically be currency supportive is gone. The interest rate flip is material, for instance, 2-year yields in China are now roughly 150 bps below US 2-year yields.
      • Chinese central bank reserves have fallen close to 5% year-to-date suggesting currency intervention has curtailed some of the depreciation pressure on the CNY. Removal of intervention may open up floodgates for more downside.
      • Risk to market bias: If Fed raises interest rates less than expected, US dollar may lose steam across the board.
      JPY

       Market Bias: Weaker vs USD

      • Yen weakens beyond 142 as interest rate differentials outweigh safe-haven appeal.
      • The weak yen will most likely not prompt the BOJ into changing its loose policy as officials focus on bolstering the economy.
      • High import prices that Japan must pay are also playing into the fall of JPY.
      • Risk to Bias: Japanese yen stops being the developed world’s only zero-yielding currency.
      AUD

      Market Bias: Weaker vs. USD

      • Australian dollar seems poised to test the July low of 0.6719 despite the Bank of Australia raising its benchmark interest rate.
      • Central bank delivers fourth consecutive 50bps increase overnight to target of 2.35% but some market watchers expect the RBA to now slow increases to allow for impact of last four hikes.
      • Risk to Bias: The RBA continues to raise rates essentially matching other central banks.
      Performance of DXY USD index before, during and after recessions since 1990

      Recession start Length (months) 12m before 6m before During recession 6m after 12m after
      7/31/1990 8 -10.6% -5.8% 5.5% -2.3% -2.6%
      3/31/2001 8 11.4% 3.8% -1.7% -3.3% -7.9%
      12/31/2001 18 -8.4% -6.4% 4.6% -2.8% 7.4%
      2/29/2020 2 2.0% -0.7% 0.9% -5.2% -7.8%
      Average 9.0 -1.4% -2.3% 2.3% -3.4% -2.7%
      Source: Bloomberg, SVB Risk Advisory
      Past outcomes are not a guarantee of future results
    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.

    Ivan Asensio, Ph.D.
    WRITTEN BY
    Ivan Asensio, Ph.D.
    Ivan Asensio is responsible for delivering strategic risk management advice to clients through direct and iterative dialogue and tailored consulting engagements.
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