Forex Major Currencies Outlook (Aug 22 – Aug 26)

USD 

Housing data for the month of July gave us widely expected data. Housing starts dropped to 1446m from 1599m in June, which is almost a 10% decline, while building permits dropped to 1674m from 1696m the previous month. Higher mortgage rates coupled with lower disposable income due to increasing prices are dissuading potential house buyers and weighing in on housing. NAHB data pointed to a slump in the sentiment of homebuilders. Another drop was seen in existing home sales that plunged from 5.11m in June to 4.81 in July. 

Consumption data for July saw retail sales come in flat vs 0.8% m/m in June. Control group came in at 0.8% m/m and posted a second consecutive monthly increase. Ex autos category came in at 0.4% m/m. Consumers continue spending, the question is how much of it is being paid by credit cards, thus increasing private debt burden. 

FOMC minutes from July meeting showed that members see inflation to be very high and their need to act to bring it down as well as to re-anchor inflation expectations back to 2%. There was a new moment in the minutes showing that “many” participants fear that they may tighten conditions too much. There was a sentence “it likely would become appropriate at some point to slow the pace of policy rate increases” indicating that Fed is open to reduce the pace of rate hikes and potentially even reverse it if data calls for it. 

The yield on a 10y Treasury started the week at 2.84% and rose to almost 3% by the end of the week. Spread between 2y and 10y Treasuries fell to -43bp, then rebounded toward -31bp for a more flat curve but still inverted. FedWatchTool saw the probability of a 50bp rate hike in September at 51.5% and probability of a 75bp rate hike at 48.5%. 

This week we will have second reading of Q2 GDP coupled with PCE data. Jackson Hole symposium begins on Thursday August 25 and goes on till Saturday. Fed often uses it as a way to communicate with markets between two FOMC meetings. 

Important news for USD: 

Thursday:

• GDP
• Jackson Hole

Friday:

• PCE
• Jackson Hole 

EUR 

German ZEW survey for the month of August showed current conditions continue to declined but slightly less than expected (-47.6 vs -48). Expectations component also continued its downward trajectory and came in at -55.3. Expectation for rising energy costs that will lead to lower consumption and economic growth are weighing down heavily on the reading. EU expectations came in at -54.9 vs -57 as expected, but down from July reading of -51.1. Second reading of Q2 GDP was slightly downgraded to 0.6% q/q from 0.7% q/q as preliminary reported and 3.9% y/y vs 4% y/y as seen in the first reading. 

Member of ECB Governing Council Isabel Schnabel stated that "a recession would not be enough to control inflation". This could indicate that ECB is getting ready to raise additional 50bp in September in their fight to reign in inflation. German July PPI data came in at astonishing 5.3% m/m vs 0.6% m/m as expected. An enormous overshoot of the estimate and this adds to the concerns about inflation continuing to rise in the months to come. 

This week we will have preliminary August PMI readings which should point toward further deterioration in economic conditions. 

Important news for EUR: 

Tuesday:

• S&P Global Manufacturing (EU, Germany, France)
• S&P Global Services (EU, Germany, France)
• S&P Global Composite (EU, Germany, France) 

GBP 

July employment reports saw further decline in the claimant count change, it is seventeenth in a row, which came in at -10.5k vs -26.8k the previous month. Employment change for the 3m period till June came in at 160k vs 296k the previous month. ILO unemployment rate for June was unchanged at 3.8%. Wages ex-bonus continued to increase and came in at 4.7% 3m/m while including bonus declined, but still printed a very healthy 5.1% 3m/m. One of the worrying factors is that job vacancies declined for the first time since August of 2020. 

Headline inflation for July came in at 10.1% y/y vs 9.8% y/y as expected and up from 9.4% y/y in June. The UK has breached double digit inflation print sooner than expected. Needless to say that this is a new 40-year high for inflation print and with BOE expecting a 13% reading in October this new high will not stand for long. This will only increase cost-of-living crisis and bring more pain to consumers and in turn to the economy as a whole. Core reading came in at 6.2% y/y vs 5.9% y/y as expected and up from 5.8% y/y the previous month indicating that inflation pressures continue to ramp up across the broader set of goods and services. 

This week we will have preliminary August PMI readings. 

Important news for GBP: 

Tuesday:

• S&P Global Manufacturing
• S&P Global Services
• S&P Global Composite

AUD

RBA minutes showed members talking about high inflationary pressures with inflation expected to peak at the end of 2022 and come down to their target of 2-3% by the end of 2024. Labour market is very strong with lowest unemployment level in 50 years. The bank will not be on pre-set rate hike path. “The size and timing of future interest rate increases will be guided by the incoming data and the Board's assessment of the outlook for inflation and the labour market, including the risks to the outlook.” Wage price index for the Q2 came in at 0.7% q/q vs 0.8% q/q as expected and 2.6% y/y vs 2.7% y/y as expected. RBA is paying close attention to the wage data and wants it to be above 3% in order to have a sustained inflation. When taking into account inflation for Q2 real wages have dropped -3.5% y/y.

July employment report was not a pleasant one. Employment change dropped -40.9k and expectations were for a 25k increase. All of the jobs lost were full-time jobs as they dropped -86.9k for the month. Part-time jobs were left to salvage the deal with 46k jobs added. On the positive side the unemployment rate ticked down to 3.4% for a 48-year low. We need to be mindful that it was achieved due to a big drop in participation rate (66.4% from 66.8% the previous month). Labor market remains incredibly tight but this report may be a warning sign of its potential loosening in the future and will surely draw attention of RBA when deciding how to proceed with tightening of monetary conditions.

July data has continued to stumble and raise concerns about China’s recovery. Industrial production slipped to 3.8% y/y while expectations were for a 4.6 y/y increase. Retail sales came in even weaker at 2.7% y/y vs 5% y/y as expected and down from 3.1% y/y in June. The unemployment rate has slipped to 5.4% from 5.5% the previous month, however the unemployment rate for people age 16-24 surged to record high 19.9%. PBOC has cut 1-Year MLF rate to 2.75% from 2.85% previously. Central bank is trying to stimulate the economy through monetary stimulus by lowering the rate for banks to borrow from PBOC. Demand for loans in China is drying up so PBOC decided to intervene.

NZD

RBNZ delivered yet another 50bp rate hike and raised OCR to 3%. Bank’s new projections do not show any signs of slowing down. They now see OCR at 3.69% in December of 2022 compared to 3.41% shown in the previous projection. OCR is expected to peak at 4.1% in September of next year and then gradually decline after December of 2023 to 3.65% in September of 2025. The statement showed need to continue tightening monetary conditions since core inflation is too high and “labour resources remain scarce”. Many indicators show “broad-based domestic pricing pressures”. Governor Orr stated in a press conference that lower growth is a reality but he does not forecast a recession. He added that they are in a strong position to get on top of inflation and that 50bp rate hikes have been sufficient. Additionally, he stated that RBNZ’s intention is for OCR to be clearly above neutral level.

CAD

Headline inflation in July came in at 7.6% y/y as expected and presented a first lower inflation reading since June of 2021. Previous month’s inflation was at 8.1% y/y. A drop in gasoline prices is the main reason for the drop in headline reading. Core readings continued to tick higher with median coming in at 5% y/y, up from 4.9% y/y in June and common at 5.5% y/y vs 5.3% y/y the previous month. With inflation spreading broadly across the CPI components we can see BOC remaining on a rate hike path and delivering additional 75bp rate hike.

JPY

Preliminary Q2 GDP reading saw economy expand by 0.5% q/q and 2.2% annualized. Q1 GDP was revised up to show stagnation instead of a contraction. Personal consumption, accounting for almost 60% of the GDP, rose by 1.1%. Business investment rebounded strongly 1.4%. Net demand was not a contributor, although exports rose by 0.9% while imports rose by 0.7% due to higher commodity prices. Core machinery orders for the month of June came in at 0.9% m/m and 6.5% y/y. Improvement in the monthly reading and coupled with a fact that core machinery orders for Q2 came in at 8.1% q/q we may expect the trend of growing investment to continue in Q3 and add to the GDP reading.

National inflation readings for July saw inflation shoot higher across all measures. Headline number came in at 2.6% y/y vs 2.4% y/y in June. Ex fresh food came in at 2.4% y/y vs 2.2% y/y the previous month. Ex fresh food, energy, which is the closest to the US core CPI reading, rose to 1.2% y/y from 1% y/y in June. Small increases to keep Japan on track with other economies around the globe. Central banks of other developed countries would be ecstatic if inflation in their countries was this low. BOJ will acknowledge the increase, but will stay firmly on its easing path.

CHF

SNB total sight deposits for the week ending August 12 came in at CHF751.3bn vs CHF749.6bn the previous week. Sight deposits have been increasing steadily since first week of July, intensifying in the last 2 weeks perhaps signalling that SNB wants to reign in declines in EURCHF and bring it back to more appropriate levels.

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_{Please note that this analysis should not be used as investing advice as it is only an overview of the economic events influencing the markets. Please remember that our accounts have Market Execution. Please note how Execution works during high impact news and other times of low liquidity.}