FX Market Weekly Recap: Sep 11-15, 2023

Risk-driven currencies exhibited robust performance, bolstered by positive economic updates emanating from the United States and China's initiation of fresh stimulus measures. Traders displayed optimism regarding the possibility of a smooth economic deceleration.

Conversely, European currencies found themselves grappling with downward pressure, with economic indicators from the region consistently failing to meet expectations, mirroring the challenges encountered by the New York Giants.

For those who may have overlooked significant occurrences in the foreign exchange market during the past week, here's a summary of the notable events.

USD Pairs

Early in the week, a willingness to take risks had a negative impact on the U.S. dollar, and later in the week, some profit-taking activity limited its movement within narrow trading ranges in anticipation of the U.S. CPI release.

The U.S. Consumer Price Index (CPI) numbers, which were in line with expectations, coupled with robust reports on U.S. retail sales and Producer Price Index (PPI) on Thursday, bolstered the belief in a "soft landing" scenario for the economy.

During the second half of the week, the USD served as a safe-haven asset, experiencing losses against commodity-linked currencies but finishing higher against European currencies such as the EUR, GBP, and CHF.

Bullish Headline Arguments

• In August, the CPI increased by 0.6% month-on-month, surpassing the 0.5% forecast and the previous month's 0.2%. The Core CPI also rose by 0.3% month-on-month, exceeding both the forecast and the previous month's 0.2%.
• MBA Mortgage Applications declined by 0.8% week-on-week, an improvement from the previous week's decline of 2.9%.
• Retail Sales for August showed a 0.6% month-on-month increase, surpassing the 0.4% forecast and the previous month's 0.5%.
• Weekly Jobless Claims stood at 220K, slightly lower than the 221K forecast and the previous week's 217K.
• The Producer Prices Index (PPI) for August increased by 0.7% month-on-month, exceeding the 0.4% forecast and the previous month's reading. The core PPI, as expected, remained at 0.2% month-on-month, consistent with the previous month's 0.4%.

Bearish Headline Arguments

• The NFIB Business Optimism Index for August was reported at 91.3, slightly below the forecast of 91.7 and lower than the previous month's reading of 91.9, with businesses expressing concerns about inflation as their top problem.

EUR Pairs

At the beginning of the week, the euro was functioning as an alternative currency, with traders refraining from making significant bets in anticipation of the European Central Bank's (ECB) monetary policy decision.

While the central bank indeed increased its interest rates, as previously discussed in our Event Guide, it also conveyed a sense of caution by suggesting the possibility of "peak rates" and a prolonged period of elevated rates. This prompted traders to reevaluate the region's economic growth indicators.

The Euro (EUR) faced selling pressure across the board on Thursday due to the less favourable high-interest rate environment. However, it managed to regain some ground on Friday.

Bullish Headline Arguments

• Germany's wholesale prices saw a 0.2% increase in August, surpassing the expected -0.1% and the previous -0.2%. However, selling prices were down by 2.7% year-on-year.
• Germany's ZEW Economic Sentiment, though negative at -11.4, exceeded the forecast of -14.0 and improved from the previous reading of -12.3.

Bearish Headline Arguments

• Italy's industrial output declined by 0.7% month-on-month in July, falling short of the expected -0.2% and contrasting with the previous month's 0.5% growth.
• Germany's Current Account for July stood at €18.7 billion, lower than the forecast of €22.3 billion and down from the previous €28.4 billion.
• Euro Area Industrial Production for July recorded a negative growth of -1.1% month-on-month, worse than the forecast of -0.3% and a decline from the previous month's 0.4%.
• The European Central Bank increased the deposit rate from 3.75% to 4.00% on Thursday. President Lagarde did not indicate that this might be the peak, but the announcement was perceived as a cautious move ("dovish hike").

GBP Pairs

The response of pound traders to what could be seen as a weak U.K. jobs report and a cautious monthly GDP update indicates their unease with the country's growth prospects, especially in the context of the current high-interest rate environment.

GBP faced downward pressure at the outset of trading during the London sessions on Tuesday and Wednesday and experienced limited attempts at recovery.

Subsequently, GBP was pushed even lower as traders expressed concerns about the growth outlook in the European region following the European Central Bank's "dovish hike."

Bullish Headline Arguments

• BOE policymaker Catherine Mann expressed her inclination to support further rate hikes to combat inflation.
• In August, the unemployment rate increased from 4.2% to 4.3%. Jobless claimants decreased significantly from 29K to 0.9K. Average wage growth remained at a record high of 8.5% in July. However, the net jobs change was a disappointing -207K, well below the forecast of -80K.

Negative Arguments

• Surprisingly, the monthly GDP contracted by 0.5% month-on-month in July, falling short of the expected -0.2%, primarily due to strikes in hospitals and schools and unusually rainy weather impacting output.
• The total trade deficit in goods and services widened by £1.2 billion to £18.8 billion in the three months leading to July, with exports declining more than imports.
• Industrial production declined by 0.7% month-on-month in July, compared to a 1.8% increase in June, with declines observed in three out of four production sectors.
• The U.K. house price gauge, as measured by RICS, reached a 14-year low of -68 in August, down from -56 in July, attributed to elevated mortgage costs and economic uncertainty.

CHF Pairs

Due to the absence of economic data releases from Switzerland, the Swiss franc's trading behaviour throughout the week was primarily influenced by its role as both an alternative currency and a safe-haven asset.

At the beginning of the week, the CHF faced selling pressure on Monday when risk appetite increased, leading to a rise in the value of the Japanese yen (JPY), another safe-haven currency.

However, starting from Wednesday, the franc began to depreciate as more traders factored in the likelihood of a "soft landing" in the United States while also expressing concerns about economic growth in the European region.

By the end of the week, it appeared that the CHF was poised to finish lower against all major currencies except the EUR and GBP.

Negative Economic News

• Switzerland's Producer Price Index showed a decline of -0.2% month-on-month in August, falling short of expectations (-0.3% expected) and a decrease from the previous month's -0.1%.

AUD Pairs

China's efforts to stimulate its economy and defend its domestic currency provided support to the Australian dollar (AUD), even in the presence of relatively weak mid-tier economic data releases from Australia.

Throughout most of the week, the AUD traded within a broad range. However, it gained strength against most of its counterparts when there was a growing belief in a "soft landing" scenario in the United States.

By the end of the week, the Australian dollar had mostly appreciated against various currencies, with the only exception being the Canadian dollar, which benefited from an uptick in oil prices.

Bullish Headline Arguments

• According to NAB, business confidence in Australia improved from 1 to 2 in August, although it still faced significant challenges, particularly in the retail sector.
• Chinese property developer giant Country Garden received approval from its creditors to extend the repayment period on six onshore bonds by three years.
• Chinese industrial production accelerated from 3.7% year-on-year to 4.5% in August, surpassing the estimated increase to 3.9%.
• Chinese retail sales rose from 2.5% year-on-year to 4.6% in August, exceeding the projected improvement to 3.0%.

Negative Economic Points

• A Westpac report indicated a 1.5% decline in Australian consumer confidence to 79.7 in September, while business conditions improved by 2 points to 13 in August.
• Melbourne Institute's inflation expectations fell from 4.9% year-on-year to 4.6% year-on-year in September.
• Australia's unemployment rate remained at 3.7% in August, with the participation rate increasing from 66.9% to 67.0%. Employment gains were higher at 64.9K, surpassing the expected 25.4K, although part-time gains (62.1K) outpaced full-time job increases (2.8K).

CAD Pairs

Rising crude oil prices and a degree of willingness to take on risk provided a boost to the Canadian dollar (CAD) throughout most of the week.

The CAD experienced relatively stable trading conditions on Wednesday and early Thursday. However, concerns about economic growth in Europe and expectations of a "soft landing" in the United States led to a strengthening of the CAD, positioning it to conclude the week with gains against most of its primary counterparts.

Bullish Headline Arguments

• On Tuesday, OPEC oil data revealed the potential for a 3 million-barrel per day shortage due to a supply squeeze in Saudi Arabia.
• Canada's Manufacturing Sales for the period showed a significant increase of 1.6% month-on-month, surpassing the forecast of 0.7% and recovering from the previous month's -2.0% decline.

Negative Economic Indicators

• Canada's Wholesale Sales for July recorded a modest 0.2% month-on-month increase, reaching C$81.3 billion. This growth was considerably lower than the previous month's 1.4%, indicating a slowdown in wholesale sales activity.

NZD Pairs

Due to a lack of significant data releases from New Zealand, the New Zealand dollar (NZD) functioned as a currency associated with risk for the majority of the week.

Specifically, it received a boost when the People's Bank of China (PBOC) issued a warning against selling the yuan on Monday. However, it experienced a decline in value as the week progressed in anticipation of the U.S. Consumer Price Index (CPI) release.

By Wednesday, the NZD began to rebound from its lowest points of the week and has since sustained its upward movement against most other currencies, with the exceptions being the Australian dollar (AUD) and the Canadian dollar (CAD).

Bullish Headline Arguments

• Overseas visitor arrivals into New Zealand continued to rebound a year on from fully opening the border, with short-term visitors up from 11.3% to 19.8% in July.
• The food price index rose by 8.9% y/y in August (vs. 9.6% y/y in July) led by grocery food prices.

Bearish Headline Arguments

• New Zealand Manufacturing Index in August: 46.1 vs. 46.6.

JPY Pairs

Rumours about the Bank of Japan (BOJ) potentially ending its era of negative interest rates as early as January next year initially lifted the Japanese yen (JPY) at the beginning of the week.

However, the JPY reached its highest point on Monday and then declined as it resumed its losses against major currencies, consistent with its status as a safe-haven currency.

In fact, the safe-haven JPY reached new weekly lows when compared to commodity-related currencies, and it experienced minimal gains against struggling European currencies such as the EUR, GBP, and CHF.

Positive Economic Factors

• During the weekend, BOJ Governor Ueda hinted in an interview with Yomiuri that the central bank might have enough information about wage increases by the end of 2023 to potentially reconsider its monetary policies.
• Sentiment among Japanese large manufacturers improved significantly, rising from -0.4 to 5.4 in Q3 2023, while the index for large non-manufacturers increased from 4.1 to 6.0.

Negative Economic Factors

• Machine tool orders experienced a 6.3% month-on-month decline in July, marking the first monthly drop in two months, with a significant year-on-year decrease of -19.7%.
• Producer price inflation slowed down from 3.4% year-on-year to 3.2% year-on-year in August, primarily due to a decrease in the cost of utilities.
• Core machinery orders fell by 1.1% month-on-month in July, missing the expected -0.9%, as manufacturers hesitated to make new investments.
• The final industrial production figure was revised from -2.0% to -1.8% in July.

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