Spectrum FX Weekly Market Update

Worldwide inflation concerns boost US dollar

Last week's theme in markets continues to be aligned with our views and forecasts: burgeoning inflationary pressures worldwide and the possibility that central bankers, particularly in the developed world, may be already behind the curve in tightening policy.

This was particularly evident across Eastern Europe, where hawkish surprises in central bank policy makers boosted most of the currencies there. For now, the rise in US yields and continued ECB dovishness is supportive of the US dollar, which last week rose against every other G10 currency.

The main event for markets this week will be the publication of the September payrolls report in the US. A number of central banks, including those in Australia and New Zealand, will meet this week. We expect a continuation of recent hawkish surprises as inflationary pressures, caused by excess demand over strained supply chains, shows little sign of abating, which should boost the respective currencies.

GBP

Headlines in the UK about shortages and lines at petrol stations cannot be helping the doves in the Bank of England make their case. Consequently, markets are busy repricing expectations for Bank of England moves, bringing them forward to the point where a full hike is priced in during the first meeting of 2022. We think this may happen even earlier.

Sterling has, however, so far failed to benefit substantially from this, dragged down by the euro and the general blow to sentiment on UK assets from the images of queuing and shortages. We expect this to change, and the prospect of sooner-than-expected hikes from the Bank of England should help the pound find a floor, at the very least.?

EUR

The inflation report out of the Eurozone delivered yet another upward surprise, even against expectations that had already undergone a significant upgrade in the days leading up to the release of the data. Headline prices rose by 3.4% on the year, the highest rate since before the global financial crisis in 2008. Even the typically sticky measure of core inflation rose to 1.9%, albeit we note that these price increases are largely a result of the base effect.

Soaring energy prices should provide ammunition to the hawks in the ECB, which have been strangely absent of late. This week's release of the minutes from the meeting will be somewhat stale, but we have a slate of speeches from ECB council members that we will be paying close attention to.

USD

Drama over the debt ceiling in the US seems to us to be one of those non-issues that should be completely ignored by markets. Other than a slight pick up in Treasury bill rates, they seem to have largely done so for now. Far more important is the steady drip of inflationary news; last week's turn was the personal consumption expenditures deflator (PCE) which again came out above expectations.

This week's payrolls report out on Friday is expected to deliver another solid, but not quite exceptional, headline of net job creation. We will be looking closely at the wage numbers for signs that employees are finally pushing back against the real wage cuts they have experienced so far this year.

CHF

The Swiss franc ended the week around the middle of the G10 dashboard. The currency was supported by bouts of risk aversion, although underperformed the other safe-havens due to broader weakness of the main European currencies and a sharp increase in US yields. Last week’s forward-looking data from Switzerland surprised to the upside, particularly the manufacturing PMI that unexpectedly rose to 68.1 in September. The services index also increased, indicating broad improvements in activity within the sector.?

The main data point out of Switzerland this week, the September CPI inflation figure, is already behind us, disappointing to the downside. In the coming days, we’ll focus mostly on changes in US yields and shifts in sentiment as they should be more important for the franc than any domestic news.

AUD

The Australian dollar ended last week moderately lower versus the US dollar. AUD fell to more than five-week lows in the middle of the week, although recovered in the second half following a spike in iron ore prices.

Preliminary data out last week showed that retail sales in Australia fell by 1.7% month-on-month in August, after a 2.7% drop a month earlier. This was the third straight monthly decline in retail trade due to the reimposition of lockdown restrictions. Even though these numbers were better than expected, we saw limited reaction in AUD. A rise in COVID-19 cases in Australia has led businesses to warn that the resulting lockdowns were creating long-lasting economic problems and the Business Council of Australia has argued that it will become necessary to open up society and live with the virusas vaccination rates increase. The announcement at the weekend that Australia will ease its border restrictions for the first time since the start of the pandemic is an encouraging step in the right direction.

The main event for AUD this week will be the Reserve Bank of Australia October meeting on Tuesday, although no material change in policy is expected.

CAD

The Canadian dollar was one of the better performers in the G10 last week, with the currency well supported by the recent jump in global oil prices, which last week rose above $80 a barrel for the first time since October 2018. CAD did, however, still end the week marginally lower versus the broadly stronger greenback.

There wasn’t too much macroeconomic news out of Canada last week, although data that we did receive was generally encouraging. Canadian factory activity growth remains strong, with the Markit manufacturing PMI coming in at 57.0 in September, little changed from 57.2 in the prior month. This extended the period of growth to 15 consecutive months. The latest monthly GDP print also beat expectations, although the data was for July and was, therefore, mostly overlooked by investors.

This week will be mostly quiet in terms of economic data releases, although Friday’s labour report will be closely watched by the market.

CNY

The Chinese yuan was one of the best-performing EM currencies last week and one of only a handful to end it higher against the US dollar. Evergrande issue continue to linger in the background, but China’s currency has proved remarkably resilient to any negative news on that front. The most recent economic data from China for September has been mixed, but a material increase in the composite PMI on the back of improvements in the services sector is a welcome sign, easing some concerns about the country’s economic growth. At the same time, news about power shortages in China is exacerbating concerns, particularly regarding the situation of the manufacturing sector that is struggling to grow.

The start of a national holiday on Friday means that the mainland’s market will be closed for most of the week and economic data will be scarce. To have a full picture of China’s business activity in September we’re awaiting Friday’s Caixin PMI data for the services sector. In the meantime, we’ll keep an eye on Evergrande, power supply issues, and other news.

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