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    • Foreign Exchange Advisory
    • FX Update

    FX Weekly: The Federal Reserve continues to pursue aggressive policy tightening

    Nicholas Farguson Headshot
    Nicholas Farguson
    • September 26, 2022
    • Keeping pace with the US Federal Reserve, several global central banks hiked interest rates last week in response to global inflation pressure. Despite this, USD gains continued.
    • News of Russian President Putin ramping up aggression in the war with Ukraine further supports the dollar, the only safe haven standing (i.e., yen, Swiss franc, gold and crypto have all lost their safe-haven appeal).
    • The pound fell dramatically against the US dollar, reaching a new historic low of under 1.04 in response to Prime Minster Liz Truss’s stimulus plan, the modest Bank of England rate increase, and pessimistic economic data.
    • In Focus: The market will be waiting on a slew of quarterly GDP data across G20 countries providing an important guide for global central banks to assess their respective economies’ ability to absorb the higher interest rates and avoid hard landings.

    Data/Events Calendar 9/26 – 9/30

    Tuesday 9/27: US Consumer Confidence, New Home Sales

    Wednesday 9/28: US Mortgage Applications

    Thursday 9/29: US, UK, Canadian GDP, US Jobless Claims, Japan Industrial Production, Chinese Manufacturing PMI, Royal Bank of India Repurchase Rate

    Friday 9/30: US PCE Deflator, Univ. of Michigan Sentiment, Eurozone Consumer Price Index (CPI)

    The Bank of Japan, hoping for some relief from USD strength, directly intervened in the foreign exchange markets last week to prop up the yen. Although the initial outcome was successful, yen rallied 4% in a matter of minutes, the yen is once again weakening. Japan joins several countries who are actively intervening in currency markets for the same purpose. The efficacy of central bank intervention from a historical perspective is mixed.

    • 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/USD0.97-1.01
      GBP/USD1.08-1.15
      USD/CAD1.32-1.36
      AUD/USD0.65-0.67
      USD/JPY140.36-145.9
      USD/CNH6.99-7.15
      USD/ILS3.43-3.52
      USD/MXN19.84-20.26
      USD/CHF0.96-0.99
      USD/INR79.58-81.26
      USD/BRL5.11-5.3
      USD/SGD1.41-1.43
      USD/DKK7.4-7.69
      USD/SEK10.67-11.33
      USD/NOK10.18-10.66

    • USD

      Fed Monetary Policy Watch:

      • US Federal Reserve raised rates 75 bps (3-3.25%) as expected by the market and remains committed to bringing inflation down to its 2% target rate with forward projections showing a potential terminal federal funds rate of between 4.5 - 5% by end of 2023.
      • Core consumer price and payroll data will be key indicators to Fed policymakers as perceived rising price inflation combined with rising payrolls increases the risk of ‘entrenched’ inflation (stagflation).
      • The Fed seems to be distancing itself from the promise of a ‘soft-landing’ as a ‘restrictive’ policy may be the only way to dampen inflation, however, leaving the door open to “assess how [their] cumulative policy adjustments are affecting the economy and inflation”.
      • Fed rate hikes continue to create large fluctuations in currencies and push the dollar to new highs. Currencies should continue to see elevated levels of volatility as both risk and interest rate sensitive assets.
      GBP

      Market Bias: Bearish

      • The Bank of England voted on raising rates 0.50% to 2.25%, a dovish outcome which put further downward pressure on the pound.
      • There are concerns mounting that Prime Minister Liz Truss’s plan to stimulate the economy through a combination of tax cuts and energy price caps could create higher inflation and counter efforts by the central bank.
      • The tax cut was also perceived by markets as a potential abandonment of fiscal responsibility, at a time when it is becoming more expensive to fund deficits. Initial reaction to the news was bearish overall.
      • Risk to current market bias: Energy prices continue to descend while UK stockpiles remain healthy ahead of winter season. Supply chains loosen, and inflation cools faster than central banks anticipate.
      EUR

      Market Bias: Bearish

      • The EUR continues to fall in the face of a more hawkish Fed policy path compared to the European Central Bank (ECB) policy. The EU faces higher risk of a deep recession and sovereign debt crisis potentially limiting how aggressively the ECB can lift rates.
      • Eurozone Composite, Service, and Manufacturing Purchase Managers’ Index (PMI) all fell from prior levels now well below the 50-level signaling the EU is facing an economic contraction.
      • Eurozone Consumer Confidence dropped to a new low of -28.8.
      • EU members are nearing approval of additional sanctions including a price cap on Russian energy. This has gained momentum after Putin’s ‘partial mobilization’ in the war with Ukraine. However, there are doubts on the effectiveness of such a policy.
      • Risk to current market bias: Energy prices continue to descend while EU stockpiles remain healthy ahead of winter season. Supply chains loosen, and inflation cools faster than central banks anticipate.
      CAD

      Market Bias: Bearish

      • Canadian retails sales in July disappointed with month over month sales down 2.5% versus a forecasted contraction of 2.0%.   
      • August year over year Consumer Price Index dropped below survey at 7% with core inflation cooling off which should give the Bank of Canada confidence in its interest rate policy is effective.
      • Markets are anticipating a 0.50% hike at the Bank of Canada’s decision next month, and another 0.25% increase in December.
      • Risk to current market bias: Supply chains loosen, and inflation cools allowing the Fed to moderate its rate hikes.
      JPY

      Market Bias: Bearish

      • Japan intervened in the FX market for first time in over two decades, while keeping interest rates unchanged at -0.10% and the Yield Curve Control (YCC) in play. On the back of this, the yen strengthened 3.5%, however the currency quickly retreated.
      • It’s doubtful that intervention will be effective as a standalone tool to control its currency depreciation as global central banks continue to lift rates and the Bank of Japan continues its policy to hold rates down.
      • Earlier last week Japanese inflation hit a 30-year high presenting significant challenges to the central bank.
      • Risk to current market bias: Continued Bank of Japan intervention could help keep the yen supported, however at a very steep cost.


      Performance relative to common FX Budget Rate:
             
        Average Rate for 2021 Current Spot    Current Spot vs 2021 Average
      AUD 0.7513 0.6507 -13.4%
      CAD 1.2537 1.3656 -8.9%
      CHF 0.9143 0.9877 -8.0%
      CNH 6.4506 7.1474 -10.8%
      EUR 1.1828 0.9655 -18.4%
      GBP 1.3757 1.0793 -21.5%
      JPY 109.85 144.25 -31.3%
    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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    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.

    Nicholas Farguson
    WRITTEN BY
    Nicholas Farguson
    Nick Farguson is a foreign exchange (FX) advisor for Silicon Valley Bank, focused on supporting growth-stage software companies in the San Francisco Bay Area.
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