Major Trading Currencies Summary For July 2022
THE EURO ZONE IS STRUGGLING WITH A WORSENING ENERGY CRISIS AS RUSSIA SHUT DOWN A GAS PIPELINE .....
■ Sinifa Lakalaka is the Foreign Exchange Dealer for the HFC
USD- data released showed that gross domestic product fell at 0.9% annualized in the second quarter. Consumer spending grew at its slowest in 2 years and business spending contracted, raising the risk that economy was the cusp of a recession.
The U.S. job openings fell less than expected in May, pointing to a still tight labor market that could keep the US Federal Reserve on an aggressive monetary policy path as it battles high inflation. The Fed is trying to cool demand for labor and the overall economy to bring inflation down to its 2% target.
The US Consumer Price Index for June surged 9.1% in June on an annual basis, driven by higher costs for gasoline, food, rent and other items, while the US Producer Price Index climbed to 11.3% YoY in June, versus the market expectation of 10.7%. However, Weekly Jobless Claims were the highest in five months, rising 244K versus 235K prior.
A softer US inflation expectations and mixed comments from the US Fed policymakers appeared to have weighed on the US dollar index. That said, US retail sales for June grew 1.0% Month on month versus 0.8% expected.
The Federal Reserve was expected to follow the footprints of the bank of Canada by accelerating its interest rates by 100 bps. However, a decent slippage in log-run inflation expectations has trimmed the forecast for a rate hike. The inflation indicator has landed at 2.8% from the prior print of 3.1%.
The US dollar continued to fluctuate ahead of the two-day Fed’s meeting as traders await on a rate hike decision and for any clues whether indications of a slowing economy will prompt a shift away from its focus on inflation. Traders have been trying to figure out if or when policymakers might pause their inflation-fighting efforts because there are signs the economy is starting to slow
The U.S. currency sank after the US Fed raised the benchmark rate by an as-expected 75 basis points to bring it closer to neutral, while noting that although the labour market remains strong, other economic indicators have softened.
The US economy contracted for a second straight quarter after the US Federal Reserve raised interest rates by three quarters of a percentage point to a range of 2.25%-2.50% in an effort to slow growth and ease price pressures.
AUD – the Australian dollar slipped after Consumer Price Index came in lower than anticipated. A 6.1% headline gives the Reserve Bank of Australia some breathing space for gradual rate rises.
Australia’s commodity-rich economy is gaining a tailwind from recent sharp increases in commodity prices, with big trade surpluses being posted even amid trade and diplomatic tensions with China.
The Aussie’s latest gains could be linked to the hopes of improvement in the US-China trade relations, as well as easing fears of the recession. The Australian Business Conditions and Business Confidence figures for June failed to impress the Aussie dollar buyers, with Business Conditions rising to 13, versus 9 expected, whereas the Business Confidence dropped to 1 from 8 expected.
The Australia’s unemployment rate dived to a 48-year low in June as hiring outstripped all expectations, while record vacancies suggested the labour market was set to tighten yet further and perhaps justify even larger increases in interest rates. Figures showed net employment had surged 88,400 in June from May, when it jumped 60,600. That blew away market forecasts of a 30,000 rise in June and brought gains for the year to a rousing 438,000. The jobless rate slid to 3.5% from 3.9%, well below forecasts of 3.8% and the lowest since August 1974.
Australia’s seasonally adjusted trade surplus rose to a record 15.97 billion Australian dollars in May, supported by a big jump in the value of exports over the month. The value of exports jumped 9.5%, driven by higher prices for coal, coke and briquettes, and other mineral fuels. Imports rose 5.8%, amid strength in shipments of fuels, lubricants, and nonindustrial transport equipment.
The Reserve Bank of Australia elevated its Official Cash Rate consecutively by 50 basis points. The inflation rate was recorded at 5.1% for the first quarter of 2022. Price pressures have soared further extensively after the prior release of the inflation rate. Higher energy bills and food products are responsible for escalating price pressures. The households in the antipodean region face the headwinds of the inflation mess, which strongly impact their paychecks.
Having witnessed the initial reaction to Australia’s key inflation gauge, traders may keep their eyes on the chatters surrounding the China-US talks and European recession for fresh impulse. Following that, the US Durable Goods Orders for June, expected -0.4% versus 0.8% prior, may offer intermediate directions ahead of the US Fed-led market volatility. The Australian Retail Sales fell short of expectations in June as consumer spending reduced, suggesting demand is decreasing in the face of surging inflation and rising interest rates. Australian retail sales rose 0.2% in June, the sixth straight month of growth but missed the market forecast of a 0.5% increase.
NZD - New Zealand’s trade data was also released as monthly trade balance flipped into a deficit of NZ $701m in June from a surplus of NZ$263 recorded in May.
The kiwi had its own problems as prices for New Zealand’s largest export earner, dairy, fell 4.1% at the latest auction.
The New Zealand dollar failed to get a lift after the country’s central bank hiked rates as expected and mostly stuck by its hawkish outlook, while the Australian dollar remained at the mercy of global recession fears.
The Reserve Bank of New Zealand raised its cash rate by 50 basis points to 2.5% and signalled it would continue to tighten “at pace” to restrain inflation.
New Zealand’s Consumer Price Index rose 1.7% in the 2nd quarter, beating expectations of a 1.5% increase. Meanwhile, the annualized inflation surged to a 32-year high of 7.3% versus 7.1% expected. The main driver was the housing and household utilities group due to rising prices for construction and rentals for housing.
Besides the recently released NZ trade numbers, the market’s riskaversion also exerts downside pressure on the Kiwi and US prices.
JPY – the Japanese Yen latest gains could be linked to markets mildly positive sentiment and firmer Treasury bond yields.
Investors will look for clues about the US Fed’s near-term policy outlook, which, in turn, could drive near-term USD demand. Nevertheless, a big divergence in the monetary policy stance adopted by the Bank of Japan and other major central banks could continue undermining the JPY. This suggests that the path of least resistance for the Japanese Yen is to the upside.
GBP & EUR- the Euro nursed losses after its sharpest drop in two weeks, as a cut in Russian gas supply sent energy prices soaring.
The EURO edged 0.1 % higher, not helped by Germany reporting its first monthly trade deficit after exports fell in May. The Deficit of 1 billion EUROs suggests Germanys export driven economy is feeling the full impact of political instability between Russia and Ukraine plus China’s covid related lockdowns and the associated damages to international supply chains.
The euro zone is struggling with a worsening energy crisis as Russia shut down a gas pipeline for regular week-long maintenance, leaving markets jittery about whether it will come back online, with Russia saying it will depend on demand and sanctions.
Despite the uncertainty, the European Central Bank is likely to stick the quarter-point rate increase it has flagged, but the outlook trails well behind the US Fed, supporting the dollar’s strength versus the euro.
The euro headed for its best week since May after the European Central Bank raised borrowing costs more than expected overnight in its first-rate hike since 2011.
It’s worth observing that anticipated weakness in the US Purchasing Managers Index and likely weakness in the UK and the eurozone activity data for July are also likely to help market sentiment in the short-term, which in turn could exert downside pressure on the US dollar and favor equities, gold and Antipodeans.
Alternatively, recession fears remain on the table and the Fed policymakers are bracing for faster rate hikes, especially after the latest ECB, which in turn can keep the risk appetite weaker moving on.
The euro later edged higher but was shortened in by uncertainty over Europe’s energy security which is not helped by a looming cut in the westbound flow of Russian gas. The British pounds are likely to remain firmer with hopes from the Bank of England for softer yields ahead of Federal Open Market Committee meeting.
Australia’s commodityrich economy is gaining a tailwind from recent sharp increases in commodity prices, with big trade surpluses ....