Navigating Economic Challenges ????

PERSPECTIVE

Asia has been one of the main growth engines of the global economy since the 1970s. The news that Asia faces its worst growth outlook in half a century is set to send shockwaves around the world. China’s economic woes play a huge part in this story, as it looks set to follow its neighbour, Japan, into a period of economic stagnation. After a multi-decade boom starting in the 1950s, Japan experienced a hard landing in the 1990s and passed the mantle of being the main driver of economic expansion in Asia on to China. For anyone working in financial markets today, the narrative of Chinese economic transformation was accepted wisdom for many years. Now that China is facing its own problems, it seems all roads lead back to the dollar. The Eurozone is too heavily dependent on a strong China to be considered a safe haven in the present climate of economic uncertainty. It also has fundamental issues of its own, with in-built imbalances between its northern and southern regions, high sovereign debt, years of weak growth and the fallout of Brexit. It seems that, in the near to medium term, a miraculous recovery in China is the only thing that could stall the dominance of the US Dollar. As things stand, of all major world economies, the US holds the best growth outlook, has the highest policy interest rates and is the most attractive safe haven by far in a period of uncertainty. Rapid rises in interest rates can cause major shocks in economies, however, and the US is not without its own worries. Soaring public and consumer debt, a shaky regional banking sector, worries over commercial real estate and ever-rising corporate bankruptcies are all significant concerns. The impacts of interest rate rises typically take 12-18 months to take full effect. By this measure it will be Q3 2024 before the last major hikes will be fully felt by the economy. The dollar is king for now, but surprises can come at any time as the FED plays its guessing game with interest rates in its fight to maintain price stability.

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US DOLLAR

• The US Dollar Index endured a volatile week with the impending potential government shutdown dominating the headlines. A risk-off mode took over the markets midweek as reports emerged of no deal being reached in Congress to avoid the shutdown. This pushed the DXY up to near 1.07 levels against a trade weighted basket of its peers. The DXY then depreciated below 106 on Friday, before recovering on Saturday after a last minute, short-term, deal was reached. The index still represented a 0.75% gain week on week, further extending its 11-week winning streak.
• Other statistical releases from the US showed strong house price data despite a larger than expected dip in new and pending home sales. High interest rates are putting off sellers, owing to unfavorable new mortgage terms and the intrinsic disincentives to switching mortgage in a high rates environment built into the 30-year fixed rate mortgages common in the US. The labour market is showing little sign of weakening with initial jobless claims remaining near historic lows, a touch above 200k. We have a number of important labour market data releases upcoming this week, culminating with the Non-Farm Payrolls report for September on Friday. Markets will be keeping a keen eye on this after some weaker than expected August data for this indicator.
• The final market moving data of the week came from the Fed’s preferred measure of inflation on Friday, the PCE Price Index. While the PCE Price Index showed inflation year on year running at 3.5%, the Core PCE print showed a welcome dip from 4.3% to 3.9% in an encouraging sign for the FED. This led to markets downgrading the chance of an additional interest rate hike this year to below 40%. We saw the dollar dip by a touch under 0.75% on Friday, on the back of this and negotiations in Congress.

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ASIA-PACIFIC

• In China we saw CNY remain steady at 7.3 against the dollar. The only data released showed negative industrial profits and flat activity PMIs in signs that recent economic stimulus has yet to make a meaningful impact on the economy. From a currency point of view, a fix at the current level against the dollar appears to be the most likely scenario in the coming weeks. The main news out of China came, once again, from the real estate sector. Thursday’s announcement from Evergrande confirmed that Hui Ka Yan, the billionaire chair of Evergrande, was under unspecified “mandatory measures for suspicion of illegal crimes”. The company has been in distress since it defaulted in its international debts in 2021 and it appears the Chinese government is unwilling to bail them out. Employees in its wealth management division have also been detained this month, as confirmed by Shenzhen police after its debt restructuring plan was derailed last week. The company has over $300bn in liabilities and its outright failure would represent a huge blow to the highly important sector. In further disappointing news for the industry, top Chinese developers recorded almost $3bn in FX losses during the first half of the year due to a weak Renminbi. It appears the government is favouring the manufacturing and export sector to pull the country out of its post-Covid economic malaise, with the real estate sector being shunned due to recent policy changes.
• The Yen endured another torrid week as it continues to weaken near to 150 levels against the dollar. There is little case for any medium-term JPY strength, with the BoJ facing widening interest rate differentials relative to other major economies, weak domestic data and little sign of a shift from ultra loose monetary policy. Adding to this is recent inflation data showing that reduced purchasing power for consumers and corporates is beginning to bite. Most investor flows are going to the US, adding further pressure on JPY as investors look to offset FX losses in their portfolios. It remains to be seen if the BoJ will look to intervene once the Yen hits 150 against the dollar, as it did in October 2022. After the last intervention we saw a major reversal in the direction of JPY against USD. Markets will be looking closely at upcoming comments from BoJ members for any sign of an upcoming move from the central bank. Weak fundamentals leave this as the only path to a reversal of recent FX weakness.
• The Aussie has stagnated against USD a touch above 0.64 in recent weeks. China worries and weak domestic data have piled further pressure on the currency, which traded above 0.71 earlier in the year. Last week was a quiet week for data, with a weaker than expected rise in retail sales for August and further manufacturing contraction. All eyes this week are on Tuesday’s RBA interest rate decision meeting where the RBA is expected to hold rates steady at 4.1%. More important will be indications of the chance of further rate rises in the coming months.

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SOUTH ASIA

• INR remained steady just above 83 vs USD last week as the Indian economy appears to be in good health. Foreign exchange reserves remain healthy, just below $600bn as the government released a print showing a 12.3% year on year increase in industrial output. Other than that, nothing major to report from India last week.
• PKR enjoyed its third consecutive week of gains against the dollar last week, appreciating by 1.7% to 287.5. Consumer confidence data came in below expectations as the effects of rapid inflation and high interest rates continue to pinch. Political unrest is still a worry with former Prime Minister Imran Khan still imprisoned and a further suicide bomb attack on Friday, with tragically high casualties. Otherwise, it has been a welcome three weeks of PKR strength.

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MIDDLE EAST AND AFRICA

• Nigerian Naira official rates remain in a stable trading range since the June devaluation of the currency, with a midpoint of 760 vs USD. The spread between this and the parallel market, meanwhile, is widening by the week. The only major news from Nigeria over the past week has been the appointment of the new central bank governor amid a worsening depreciation in the Naira. Reportedly dollar shortages are worsening as the government is diverting funds to repay USD based debts, leaving individuals to seek supply on the black market. The new governor certainly has a tough job on his hands and markets will be looking out for hints on future monetary policy changes.
• There was nothing new to report out of Kenya this week as the downtrend in Kenyan Shilling continued on pace with the previous two years. The domestic market in Kenya is eagerly awaiting promised action on fraud, foreign currency hording and initiatives to incentivize much-needed dollar flows into the country. KES finished the week trading at 148.20 against USD.
• The Tanzanian Shilling remained relatively steady, depreciating slightly to 2510 against USD as the central bank and government continue to take measures to address Dollar shortages and prevent more significant depreciation. There was no major market moving news this week from Tanzania. More time is needed to see how effective the current package of government interventions will prove to be.
• South African Rand depreciated by over 1% to trade a touch above 19 Rand to USD. Inflation continues to tick upwards, but activity and growth remain relatively weak, leaving less room for further rate hikes. A risk-off sentiment in the market is weakening emerging market currencies and this trend looks set to remain in the coming months.

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EUROPE

• GBP experienced yet another disappointing week, falling 0.3% against the dollar, ending the week trading below 1.22. Data last week showed a welcome uptick in GDP growth, consumer credit and mortgage approval data. The overarching theme, however, is the risk off sentiment in the overall market pushing safe haven flows into the dollar. Equity markets are dropping globally as the 2022 interest rate hikes begin to take full effect and investments in USD based assets become more attractive. In the coming week there are a number of activity PMIs coming from the UK. However, the direction of GBP is likely to be led by the US employment data to be released this week.
• The Euro endured a difficult week, ending up 0.75% down against USD. At one-point, EURUSD traded below 1.05 for the first time since March. It is now down 7% since its July peak of 1.127 after ECB interest rates futures were revised downwards due to negative growth and economic activity data. Future rate expectations predict a significant interest rate differential for the next 18 months. With a worsening global picture and robust US growth it is difficult to make a strong case for Euro strength in the final quarter of 2023. The Eurozone will be hoping for a reversal in fortunes from a major trading partner, China, to fuel a rebound in the struggling common currency.

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OTHER NEWS ?

• Afghanistan’s currency was the best-performing in the world in the third quarter of 2023 as foreign aid inflows and extremely strict capital controls helped the Afghani recover from historic lows following the Taliban’s takeover in 2021.
• The World Bank has cut its forecast for China’s 2024 growth and warned Asia faces one of the worst economic outlooks in half a century. The projections show that the region, one of the world’s main growth engines, is set for its slowest pace of growth since the late 1960s, excluding extraordinary events such as the coronavirus pandemic, the Asian financial crisis and the global oil shock in the 1970s.

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PERFORMANCES AGAINST US DOLLAR

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THE WEEK AHEAD

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Monday, Oct 2nd ???

• UK Nationwide Housing Prices
• EU HCOB Manufacturing PMI
• UK S&P Global/CIPS Manufacturing PMI
• EU Unemployment Rate
• Canada S&P Global Manufacturing PMI
• UK S&P Global/CIPS Manufacturing PMI

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Tuesday, Oct 3rd ???

• Australia Building Permits
• Australia RBA Rate Decision
• US JOLTs Job Openings

Wednesday, Oct 4th ????

• Australia Judo Bank Service PMI
• Japan Jibun Bank Composite PMI
• EU HCOB Composite PMI
• UK S&P Global/CIPS Composite PMI
• EU Retail Sales
• EU PPI
• US ADP Employment Change
• US S&P Global Composite PMI

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Thursday, Oct 5th ????

• UK S&P Global/CIPS Construction PMI
• Canada Balance of Trade
• US Balance of Trade

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Friday, Oct 6th ?????

• Australia Retail Sales
• UK Halifax House Price Index
• Canada Unemployment Rate
• US Non-Farm Payrolls
• US Unemployment Rate
• US Average Hourly Earnings

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