Weekly Recap July 31 – August 04, 2023

Last week, concerns regarding worldwide economic growth and the expectation of continuously high global interest rates prompted traders to divest from commodity-linked currencies and instead seek refuge in haven currencies.

Among these safe havens, the U.S. dollar emerged as the clear winner, benefiting from rising bond yields in the United States. Simultaneously, the euro also demonstrated robust performance in the forex market.

For those interested in the major highlights of the forex market last week, here's a recap of the FX activities:

USD Pairs 

 On Monday, most currencies gained ground against the dollar, except for the Japanese yen, as investors grew optimistic about a smooth economic transition in the U.S., leading to an increased appetite for risk.

Subsequently, USD traders changed their focus and sought safe-haven assets, likely driven by higher U.S. Treasury yields and speculation that the Federal Reserve would maintain elevated interest rates for an extended period.

In the early Asian session on Wednesday, the dollar faced a setback after Fitch downgraded the U.S. credit rating. However, the Greenback quickly regained stability as the Thursday session progressed.

Despite the disappointing U.S. Non-Farm Payrolls (NFP) report for July, which caused the dollar to give up some of its gains, it managed to maintain a dominant position by the week's end.

Bullish Headline Arguments

ISM manufacturing PMI for July registered a reading of 46.4, surpassing June's figure of 46.0, indicating a slower contraction rate.

Chicago Fed President Goolsbee stated, "When you're around the transition point, every meeting is a live meeting."

The ADP National Employment Report for July indicated an employment gain of 324.0k, exceeding the forecast of 210.0k and the previous reading of 455.0k.

Bearish Headline Arguments

Chicago PMI for July came in at 42.8, missing the forecast of 43.0 and falling short of the previous figure of 41.5.

The Fed's bank lending survey indicated that U.S. banks reported tighter credit conditions and weaker loan demand in Q2 2023.

JOLTS job openings decreased by 34,000, reaching their lowest levels since April 2021. Layoffs and resignations suggested reduced confidence in the labour market.

July's job cuts amounted to 23.6K, compared to 40.7K cuts in June.

Fitch, a credit rating agency, downgraded the U.S. long-term credit grade from AAA to AA+, citing expected fiscal deterioration over the next three years, a growing government debt burden, and governance erosion relative to higher-rated peers.

Atlanta Fed Governor Bostic noted, "We are in a phase where there is some risk of overtightening."

S&P Global US Services PMI for July registered a reading of 52.3, lower than the previous figure of 54.4. The report indicated that inflationary pressures remained historically elevated, with service providers experiencing notable increases in input costs and output charges, often attributed to wage hikes.

July's ISM Services PMI was 52.7, down from the previous reading of 53.9. The prices index rose by 2.7 to 56.8, while the employment index fell by -2.4 to 50.7.

Weekly jobless claims increased by 6k week-over-week, reaching 227k. Continuing claims rose by 21k to 1.7M. Productivity rose by 3.7% quarter-over-quarter in Q2, rebounding from the -2.1% figure in Q1. Unit labour costs increased by 1.6% quarter-over-quarter, compared to the previous reading of 4.2%.

U.S. Non-Farm Payrolls for July came in at 187.0k, slightly below the forecast of 190.0k and the previous reading of 185.0k. The unemployment rate decreased to 3.5%, in line with the forecast and the previous rate of 3.6%.

EUR Pairs 

 At the beginning of the week, the euro saw an increase in safe-haven demand as traders shifted their focus towards selling riskier assets, particularly commodity-based currencies. The currency was further supported by a better-than-anticipated flash Consumer Price Index (CPI) reading for the Euro area, attracting fundamental buyers. Additionally, updates on the Purchasing Managers' Index (PMI) suggested a possible stabilization in negative business sentiment.

As the week progressed, the euro maintained relative stability, trading within specific ranges.

By the end of the week, the euro had made gains against most major currencies, though it did not fare as well against the U.S. dollar

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Bullish Headline Arguments

Euro Area flash consumer prices for July increased by 5.3% year-on-year, surpassing the forecast of 5.2% and the previous figure of 5.5%. Core CPI aligned with June at 5.5% year-on-year, in line with the forecast.

Germany's unemployment rate unexpectedly dropped from 5.7% to 5.6% in July, with a net decrease of 4,000 people out of work, despite ongoing labour demand challenges.

The Euro Area's unemployment rate for June 2023 came in at 6.4%, lower than the forecast of 6.6% and the previous rate of 6.4%.

Spain experienced a net loss of 11,000 jobs in July, outperforming the forecast of -38,200 and the previous figure of -50,200.

Germany's trade surplus expanded from 14.4 billion EUR to 18.7 billion EUR in June, as exports grew by 0.1% month-on-month, outpacing a decline of imports by -3.4% month-on-month.

Bearish Headline Arguments

Germany's retail sales for June declined by -0.8% month-on-month, missing the forecast of 0.0% and contrasting with the previous growth of 1.9% month-on-month.

Germany's import prices for June dropped by -11.4% year-on-year, worse than the forecast of -10.7% and the previous figure of -9.1%, primarily attributed to lower energy prices.

France's HCOB manufacturing PMI fell from 46.0 to 45.1 in July, marking its lowest level since May 2020.

HCOB Eurozone Manufacturing PMI for July registered a reading of 42.7, lower than the previous figure of 43.4.

HCOB Eurozone Services PMI Business Activity Index for July decreased to 50.9 from the previous 52.0. The report highlighted a decrease in input cost inflation below its long-term average, while employment growth continued despite slowing business activity.

European Central Bank Chief Economist Philip Lane projected a significant drop in the inflation rate for 2023, suggesting that interest rates might be near their peak.

GBP Pairs 

 Throughout the week, the British pound experienced considerable volatility against its major counterparts due to market focus on significant data releases from other major economies.

On Tuesday, the pound showed strength against commodity-based currencies as risk aversion prompted a decline in riskier assets.

Thursday's "hawkish hike" by the Bank of England initially caused the pound to slide, but as traders paid more attention to the hawkish aspect of the decision, the currency bounced back to nearly its initial levels.

Bullish Headline Arguments

Mortgage approvals for June came in at 54.7K, surpassing the forecast of 47K, and higher than the 51.1K recorded in May.

M4 Money Supply for June decreased by -0.1% month-on-month, following a previous increase of 0.3% month-on-month.

The Bank of England (BOE) raised its key interest rate by the expected 25 basis points to 5.25% on Thursday. The BOE cautioned that interest rates are likely to remain elevated for an extended period.

S&P Global / CIPS UK Construction PMI for July reported a reading of 51.7, surpassing the forecast of 48.9.

Bearish Headline Arguments

Nationwide reported that UK house prices declined by 3.8% year-on-year in July, marking the largest drop since 2009.

The British Retail Consortium (BRC) indicated that prices in UK stores fell for the first time in two years, declining by 0.1% in July compared to June.

The UK's S&P Global/CIPS manufacturing PMI for July dropped to 45.3, marking its lowest reading since May 2020. This decline was attributed to accelerated contractions in output, new orders, and employment.

S&P Global / CIPS UK Services PMI for July recorded a reading of 51.5, compared to the previous figure of 53.7. The report highlighted another significant increase in average cost burdens reported by service sector companies in July.

CHF Pairs 

 At the beginning of the week, the Swiss franc experienced some losses, but it quickly recovered its strength and moved into positive territory as market sentiment significantly deteriorated during the later part of the Tuesday U.S. session.

On Wednesday, a disappointing business survey update led to a decline in the safe-haven currency. Nevertheless, this situation was promptly reversed as Swiss franc traders refocused on the prevailing broad risk aversion sentiment, which continued to dominate throughout the rest of the week.

Bullish Headline Arguments

SECO consumer sentiment improved only slightly from -30 to -27 in July, which remains far below the long-term average of -6. The persistent high prices continued to impact household budgets.

Headline consumer inflation was in line with expectations, decreasing by 0.1% month-on-month (1.6% year-on-year) in July. Core CPI also saw a decline of 0.2% month-on-month (-1.7% year-on-year).

Bearish Headline Arguments

The Procure manufacturing PMI further contracted, declining from 44.9 to 38.5 in July.

CAD Pairs 

 With minimal significant economic data releases from Canada until Friday, the Canadian dollar (CAD) was primarily driven by movements in crude oil prices, especially until the notable Canadian employment report.

CAD recorded gains against major currencies as elevated oil prices offset the prevailing risk-off sentiment that influenced various asset classes throughout the week.

However, on Friday, the substantial surge in oil prices failed to counter the impact of a disappointing Canadian jobs update for July, which revealed a decline in net employment and a slight increase in the unemployment rate. Moreover, the latest Ivey PMI report indicated contractionary conditions within the business sector, likely attracting additional fundamental sellers in anticipation of the weekend.

Bullish Headline Arguments

S&P Global's Canada Manufacturing PMI for July showed an increase to 49.6 from June's 48.8.

Bearish Headline Arguments

Canada's Employment Change for July reported a decrease of 6.4 thousand jobs (versus an expected increase of 20.0 thousand) following the previous month's gain of 59.9 thousand. The unemployment rate ticked up to 5.5% from the forecast and previous 5.4%.

Canada's Ivey PMI for July came in at 48.6 compared to the previous reading of 50.2. The Employment Index dropped to 54.2 from 57.6, and the Prices Index rose to 65.1 from 60.6.

NZD Pairs 

 During this past week, New Zealand had limited prominent reports, leading the New Zealand dollar (NZD) to predominantly trade as a "risk" asset and behave inversely to its counterparts.

At the start of the week, the NZD began to decline against "safer" assets immediately after China's Caixin manufacturing PMI showed contraction on early Tuesday. The downward momentum intensified further during the U.S. credit rating downgrade before eventually stabilizing within relatively narrow ranges during the latter part of the week. Additionally, it can be argued that these bearish movements were influenced by a simultaneous decline in the Australian dollar (AUD), a behavioral tendency frequently observed due to the close trading and geographical connections between New Zealand and Australia.

Bullish Headline Arguments

ANZ's business outlook survey revealed that a net of 13.1% of respondents anticipated a deterioration in the New Zealand economy in July, reflecting a 5-point improvement from June.

The unemployment rate increased from 3.4% to 3.6% in Q2 2023, marking a two-year high. This rise stemmed from robust labor demand juxtaposed with a larger pool of job seekers.

Bearish Headline Arguments

Home-building consents decreased by 2.6% quarter-on-quarter in Q2, reaching their lowest levels since Q3 2020. Factors such as elevated interest rates and a slowdown in property activity contributed to the deceleration in construction.

JPY Pairs 

 During the first half of the week, risk appetite and intervention by the Bank of Japan (BOJ) in the bond markets caused the yen to reach its lowest levels.

However, as the week progressed, concerns about the "higher for longer" interest rate narrative and global economic growth gained prominence in broader markets. This led the safe-haven yen to receive buying support against its primary counterparts, with the exception of the U.S. dollar.

Bullish Headline Arguments

Industrial production experienced a rebound of 2.0% month-on-month in June (compared to the anticipated 2.5% and a decline of -2.2% in May). This recovery was driven by increased output in automobiles and electronic devices.

Retail sales exhibited a growth of 5.9% year-on-year in June (versus the expected 5.4% and May's 5.8%). However, monthly retail trade declined by 0.4% (against an expected gain of 0.2% and May's 1.4%).

Japanese consumer confidence improved from 36.2 to 37.1 in July.

The unemployment rate marginally decreased from 2.6% to 2.5% in June, marking the lowest level since January.

Bearish Headline Arguments

On Monday, BOJ reportedly conducted an unscheduled bond purchase operation of about 300 billion JPY (2 billion USD) after Japanese bond yields briefly surged to 0.605%, the highest since June 2014.

Housing starts witnessed a decline of 4.8% year-on-year in June (contrary to the expected -0.2%), following a 3.5% increase in May.

The minutes of BOJ's June meeting indicated that members did not perceive an immediate necessity to adjust Yield Curve Control (YCC) policies, despite implementing changes in July.

On Thursday, BOJ initiated a second unscheduled bond-purchasing operation, announcing the purchase of 400 billion JPY ($2.8 billion) worth of securities after the 10-year note reached a new nine-year high of 0.65%.

au Jibun Bank Japan Services PMI for July: 53.8 (versus June's 54.0); the report highlighted that Japanese service providers reported a reduction in employment levels for the first time in the year.

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