Weekly Recap August 14 -18, 2023

Favourable economic reports exceeding expectations in both the United States and the United Kingdom further solidified the assertive stance of the Federal Reserve and the Bank of England. This resulted in the notable ascent of the U.S. dollar and the British pound in the performance rankings for the current week.

On the contrary, concerns surrounding China's economic expansion tempered the demand for currencies tied to commodities, exemplified by the Australian and New Zealand dollars (AUD and NZD). These concerns also played a role in cultivating a cautious market atmosphere throughout the entire week.

For those who might have missed the pivotal developments in the forex market, presented below is a synopsis highlighting the key insights gleaned from the preceding week's foreign exchange activities:

USD Pairs

Source: Finlogix Charts

During the initial half of the week, the U.S. dollar presented a mixture of performance outcomes, demonstrating fluctuating gains primarily attributed to optimistic anticipations of gradual economic stabilization within the United States. Concurrently, it grappled with concerns associated with China's economic expansion.

The quest for safe-haven assets gathered noteworthy momentum on Wednesday, a trend accentuated by the release of the Federal Open Market Committee (FOMC) meeting minutes. These minutes validated the consensus regarding a 25-basis points rate hike in July and underscored the members' predisposition for additional tightening in response to heightened risks of inflation.

The concluding phase of the week saw the U.S. dollar concluding on a positive note, marking significant advancements against currencies linked to commodities, notably the Australian dollar (AUD), New Zealand dollar (NZD), and Canadian dollar (CAD). However, it ceded ground against the British pound (GBP) due to heightened expectations of assertive measures by the Bank of England (BOE).

Bullish Headline Arguments

July 2023 Retail Sales: Up 0.7% month-on-month (forecast/previous: 0.3% month-on-month); Core Retail Sales surged 1.0% month-on-month (forecast: 0.3% month-on-month; previous: 0.2% month-on-month)July 2023 Import Prices: Increased by 0.4% month-on-month (forecast: 0.2% month-on-month; previous: -0.1% month-on-month)Neel Kashkari, President of the Minneapolis Fed, expressed the view that the rate hikes might continue, citing the need to gather additional data before making decisions.July Industrial Production: Rose by 1.0% month-on-month (forecast: 0.2% month-on-month; previous: -0.8% month-on-month)FOMC Meeting Minutes: "Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy." However, a few participants advocated for keeping rates unchanged in July.August Philly Fed Manufacturing Index: Recorded a value of 12.0 (forecast: -8.0; previous: -13.5); the Employment index declined from -1.0 to -6.0, while the Prices Paid Index increased from 9.5 to 20.8.Bearish Headline Arguments

August NY Empire State Manufacturing Index: Dropped to -19.0 (forecast: 4.0; previous: 1.1)August NAHB Housing Market Index: Fell to 50.0 (forecast/previous: 56.0)Mortgage Demand: Declined as the average 30-year fixed-rate mortgage rose to 7.16% from 7.09% in the previous week.July Building Permits: Edged up by 0.1% month-on-month (forecast: 1.1% month-on-month; previous: -3.7%); Housing Starts increased by 3.9% month-on-month (forecast: 1.7% month-on-month; previous: -11.7% month-on-month)Weekly Initial Jobless Claims: Reported at 239.0k (forecast: 241.0k; previous: 250.0k); continuing claims rose to 1.716 million from 1.684 million.EUR Pairs

Source: Finlogix Charts

The Euro (EUR) primarily responded to broader trends in the FX landscape this week due to a dearth of notable reports emerging from the Eurozone.

Support for the Euro arose from data surpassing expectations, notably positive Eurozone GDP and sentiment reports. Additionally, the Euro's relatively understated role as a safe-haven currency within the region contributed to its upward trajectory against currencies linked to commodities. Nevertheless, the EUR faced setbacks against the resilient British Pound (GBP) and safe-haven choices like the United States Dollar (USD), Swiss Franc (CHF), and Japanese Yen (JPY).

Bullish Headline Arguments

German ZEW Economic Sentiment Index for August: Recorded at -12.3 (forecast: -15.0; previous: -14.7)Euro Area Flash GDP estimate for Q2 2023: Growth of +0.3% quarter-on-quarter (previous: 0.0% quarter-on-quarter)Euro Area Industrial Production for June 2023: Increased by 0.5% month-on-month (forecast: -0.3% month-on-month; previous: 0.0% month-on-month)Bearish Headline Arguments

Germany Wholesale Prices for July 2023: Decreased by 2.8% year-on-year (forecast: -2.5% year-on-year; previous: -2.9% year-on-year). The decline was primarily driven by a significant drop of -20.8% year-on-year in wholesale petroleum products.Flash Euro Area Employment Estimate: Registered a growth rate of 0.2% quarter-on-quarter (previous: 0.5% quarter-on-quarter).Euro Area Consumer Price Index (CPI) for July 2023: Decreased by -0.1% month-on-month (forecast: -0.1% month-on-month; previous: 0.3% month-on-month).GBP Pairs

Source: Finlogix Charts

The British pound took the lead as the strongest currency throughout this week, primarily propelled by the latest wage and core inflation figures from the UK. These data points presented an opportunity for the Bank of England (BOE) to consider further rate hikes. In fact, some market participants are even contemplating the possibility of the central bank achieving an official bank rate of 6.00% within this year.

Right from the start of the week, the GBP had been demonstrating an upward trajectory against currencies linked to commodities. However, the currency's gains broadened significantly after the release of the UK's hawkish data, reaching its pinnacle on Thursday.

On Friday, a retail sales report from the UK fell short of expectations, prompting traders to secure profits in anticipation of the weekend.

Bullish Headline Arguments

Average Weekly Earnings, including bonuses: Increased by 8.2% year-on-year in the three months leading up to June, marking the most significant surge since July 2021.Headline Inflation for July: Eased from 7.9% year-on-year to 6.8% year-on-year, in line with expectations; Core Inflation remained at 6.9% year-on-year (versus the forecasted 6.8% year-on-year).Bearish Headline Arguments

Unemployment Rate: Rose from 4.0% to 4.2% in the three months to June, reaching the highest level since October 2021.Jobless Claimant Count Change: Increased by 29,000 in July (forecast: 19.6K; previous: 16.2K).Producer Input Prices: Declined by 3.3% year-on-year in July, a deeper fall compared to June's 2.2% year-on-year decrease. Output (Factory) Prices also dropped by 0.8% year-on-year, contrasting with the 0.3% year-on-year rise in June.UK Retail Sales: Slid by -1.2% month-on-month in July, exceeding the estimated -0.6% decrease, and downgraded from the initially reported 0.7% increase.CHF Pairs

Source: Finlogix Charts

During the initial portion of the week, the Swiss franc (CHF) showcased notable oscillations as a countervailing currency. Traders factored in substantial reports from other economies while forming their evaluations.

The trajectory of CHF's movement lacked clear-cut patterns until Wednesday, when apprehensions surrounding China's economic expansion intensified vulnerabilities in commodity-linked currencies. Simultaneously, expectations of assertive measures from both the Federal Reserve (Fed) and the Bank of England (BOE) bolstered the prowess of the U.S. dollar and the British pound.

Bearish Headline Arguments

The Producer Price Index experienced a decline of 0.1% month-on-month in July (forecast: 0.2%; previous: 0.0%).Swiss Industrial Production for Q2 2023: Recorded a contraction of -0.8% year-on-year (forecast: 2.5% year-on-year; previous: 4.2% year-on-year).AUD Pairs

Source: Finlogix Charts

During the week concerns surrounding China's economic expansion, underwhelming Australian data releases, and anxieties about an elevated interest rate environment, the past week unfolded unfavourably for those holding optimistic views about the Australian dollar (AUD).

Compounding these challenges, the meeting minutes from the Reserve Bank of Australia (RBA) conveyed that its members already believe they can attain their inflation target "without altering the cash rate from its existing level."

The AUD exhibited substantial trading ranges on both Monday and Tuesday. Nonetheless, as the week advanced, it encountered downward pressure, breaking its downward trajectory on Wednesday and hitting fresh weekly lows by Thursday. The bearish sentiment eventually subsided following the downward movement spurred by the Australian employment report, which fell short of expectations.

Bullish Headline Arguments

Melbourne Institute Leading Index: Experienced a slight uptick from -0.67% to -0.60% in July, with expectations of "below-trend growth momentum extending into 2024."Bearish Headline Arguments

Over the weekend, China's leading private property developer, Country Garden, halted trading for 11 of its onshore bonds starting Monday.The People's Bank of China (PBoC) surprisingly reduced the rate on 401 billion CNY ($55.25 billion) worth of one-year Medium-Term Lending Facility (MLF) loans by 15 basis points to 2.50%, marking its second cut within three months.China's fixed asset investments recorded a 3.4% increase in the first seven months of 2023 compared to the same period the previous year (forecast: 3.8%; previous: 3.8%).RBA's August meeting minutes conveyed the existence of a "credible path back to the inflation target with the cash rate remaining at its present level."PBoC injected 297 billion CNY in cash through seven-day reverse repurchase contracts and set the yuan's fixing rate 783 pips higher than the average estimate.Australia's wage price index grew by 3.6% year-on-year in Q2 (forecast: 3.7%; previous: 3.4%), supporting the RBA's decision to potentially pause further rate hikes in September.CAD Pairs

Source: Finlogix Charts

Despite an unexpectedly higher Canadian inflation report, the Canadian dollar's (CAD) performance this week did not receive a positive boost. The commodity-linked currency remained responsive to the ongoing risk sentiment.

In simpler terms, CAD displayed wide trading ranges initially, but it eventually succumbed to broader FX trends. This encompassed shifts towards currencies less reliant on commodities, proclivity towards the U.S. dollar (USD), and favourability towards the British pound (GBP), all of which significantly influenced the trajectory of the Loonie's value.

As the week ended, CAD appeared poised to secure gains against the Australian dollar (AUD) and the New Zealand dollar (NZD). However, it is likely to encounter declines when compared to safe-haven currencies, GBP, and even the Euro (EUR).

Bullish Headline Arguments

July Consumer Price Index (CPI): Increased by 0.6% month-on-month (forecast: 0.4% month-on-month; previous: 0.1% month-on-month); Core CPI stood at 0.5% month-on-month (forecast: 0.5% month-on-month; previous: -0.1% month-on-month).Wholesale Trade for June: Surged by 2.8% month-on-month (forecast: -4.4% month-on-month; previous: 2.9% month-on-month).Bearish Headline Arguments

Housing Starts for July: Declined by -10% year-on-year to 255.0 thousand (forecast: 243.0 thousand; previous: 283.5 thousand).NZD Pairs

Source: Finlogix Charts

Much like the Australian dollar, the New Zealand dollar (NZD) displayed notable trading ranges in the early days of the week. However, subsequent concerns related to risk aversion and China's economic growth negatively affected the performance of this currency tied to commodities.

It is anticipated that the New Zealand dollar will wrap up the week with an overall decline in value, except in relation to the Australian dollar.

During this week, the NZD exhibited only a marginal increase in strength compared to the AUD. This difference could potentially be attributed to the Reserve Bank of New Zealand's (RBNZ) decision to maintain a "hawkish hold," which contrasts with the Reserve Bank of Australia's (RBA) less hawkish meeting minutes.

Bullish Headline Arguments

June Overseas Visitor Arrivals: Recorded a growth of 11.3% after experiencing three consecutive months of decline.New Zealand removed all its COVID-related restrictions, including mandatory mask-wearing and isolation for those testing positive.As expected, the RBNZ maintained its official cash rate at 5.5% in August, stating that rates should remain restrictive for the foreseeable future.Bearish Headline Arguments

July Business Services Index: Experienced a further contraction from 49.6 to 47.8, indicating a significant decline in demand that accelerated the existing downward trend.Global Dairy Prices Index as of August 15, 2023: Decreased by -7.4% to $2.875.RBNZ Governor Orr emphasized that mild inflation represents the minimal acceptable level before contemplating rate cuts. He further mentioned that there is no urgency to hastily adjust rates.JPY Pairs

Source: Finlogix Charts

References to a "YENtervention" had the effect of curbing the yen's upward momentum and even triggering downward movement in the early part of the week.

Nevertheless, the yen eventually resumed its customary role as a safe haven. In essence, it closed out the week with advances against currencies linked to commodities and the Euro, while ceding ground to the USD and GBP due to the strong anticipation of assertive measures by central banks.

Bullish Headline Arguments

Industrial Output: Revised higher from 2.0% to 2.4% month-on-month in June (compared to May's -2.2%).Gross Domestic Product (GDP): Expanded by 1.5% quarter-on-quarter in Q2 (forecast: 0.8%; previous: 0.7%), with annual GDP growth reaching 6.0% (previous: 3.6%). This growth was supported by auto exports and tourist arrivals, offsetting the slowdown in consumer recovery.Japanese National Core Consumer Price Index (CPI): Decelerated from 3.3% year-on-year to 3.1% as expected in July, primarily due to minimal increases in unit labor costs.Japan Services Inflation: Advanced to 2% in July, marking the first occurrence in 30 years, thereby bolstering the case for policy normalization.Bearish Headline Arguments

Japan's Trade Balance for July: Recorded a deficit of -78.7 billion JPY (forecast: 26.0 billion JPY; previous: 43.1 billion JPY).This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.