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    • Foreign Exchange Advisory
    • FX Update

    Inflation slowed. Stocks surged & the USD sold off. What’s next?

    • August 15, 2022
    • US inflation came out cooler than expected this month as the prices of oil and most commodities have fallen sharply from this year's highs.
    • The Adobe Digital Price index, an alternative to US CPI Index which better leverages digital transactions to gauge price changes, agrees that inflation is cooling. It sees 0.3% YoY inflation and a drop in prices MoM.
    • We have entered a data-dependent stage where the focus has shifted to gaining insight as to whether a hard or soft-landing is ahead.

    Economic Releases this week:

     

    Monday: UK Employees change   

    Tuesday: US Housing Starts*, UK CPI, Canada CPI 

    Wednesday: FOMC Meeting minutes

    Thursday: US Existing Home Sales*, UK Retail Sales

    Friday: Canada Retail Sales

     

    *Markets may interpret negative data on the housing front as indicative of further economic slowdown in the US.

    According to an FX Risk Advisory study featured in the SAM Quarterly publication, the US has been in a stagflation-ary environment in 18 quarters over the last 50 years, including both quarters in 2022. The US dollar outperformed in these quarters of high inflation and low growth, as compared to all periods.

    • 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/USD1.01-1.04
      GBP/USD1.20-1.23
      USD/CAD1.27-1.30
      AUD/USD0.69-0.71
      USD/JPY131-136
      USD/CNH6.71-6.77
      USD/ILS3.18-3.36
      USD/MXN19.81-20.44
      USD/CHF0.93-0.96
      USD/INR79-80
      USD/BRL5.03-5.17
      USD/SGD1.36-1.38
      USD/DKK7.17-7.32
      USD/SEK10-10.22
      USD/NOK9.46-9.88

    • USD

      The US dollar dropped sharply against the major currencies after the positive inflation report. The consumer price index fell to 8.5% YoY vs. the forecast of 8.7%, down 0.6% from June. Data is encouraging as it suggests inflation will moderate from the June peak of 9.1%. After all, we could not say inflation was close to the end until we got the peak behind us. As the Fed can be data-dependent when it considers its next move, a 50 bps Fed hike vs. 75 bps is fully priced-in with expectations that Fed can ease its rate hiking. If the September inflation report continues with softening pricing pressure momentum, it may lead to a less hawkish Fed going forward, which would further lead to a reversal in the USD (weaker).

      GBP

      GBP/USD rallied as US inflation data was better than expected, but the recession fear, increases in the energy bill, and the race for UK prime minister left GBP more vulnerable. The Bank of England raised the interest rate to 1.75% this month with estimations of a deep recession later this year alongside 13% inflation. Liz Truss, British Foreign Secretary, is currently the favorite to become the next prime minister, and she believes her tax-cutting plan can help the cost-of-living crisis.

      EUR

      EUR/USD extended its gain but still has potential for sharp moves in either direction due to the inflation concerns. To prevent divergence in borrowing costs and a sovereign debt crisis within the eurozone, the new Transmission Protection Instrument (TPI) lets the ECB buy bonds from indebted countries to keep bond yields and spreads under control. The anti-fragmentation tool is working – the spreads among 10Y yields are in the acceptable range. On top of that, after delivering a 50 bps rate hike in July, the market expects a 50 bps rate hike in September, bringing the ECB’s primary rate to 0.50%.

      CAD

      Broader USD weakening has been supporting CAD's value despite softening oil prices. The Bank of Canada hiked the interest rate to 2.5% last month, resulting in a borrowing cost surge that weighs on mortgage demand. Market's expectation of 100 bps rate hikes by the end of this year has not changed, and the country’s economic growth is estimated to slow to 2% in Q3, from 4% in Q2.

      ASIA/PACIFIC

      JPY strengthened against the USD following the US inflation report, but the overall risk-on sentiment could potentially eat away the gain as JPY is viewed as the safe haven asset.  

       

      In response to Nancy Pelosi’s visit to Taiwan, China expanded drills and new trade blocks against Taiwan marking a political warning against outside interference over the island. Last Thursday, Taiwan held defensive military drills. The ongoing military exercises and "possible invasion" could cause shipping lines to shut down or reroute, which would be problematic for trade flows around the world.  

      Currencies rallying versus USD from 2022 lows
        Date of low          2022 low    Spot   Appreciation since low
      CAD 14-Jul 1.3224   1.2926    +2.3%
      AUD 14-Jul 0.6682   0.7028    +5.2%
      CHF 16-May 1.0065   0.9426    +6.3%
      EUR 14-Jul 0.9952   1.0217    +2.7%
      GBP 14-Jul 1.176   1.2102    +2.9%
      JPY 14-Jul 139.39   132.67    +4.8%
      CNH 13-May 6.838   6.7697    +1.0%
    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.

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