FX Market Weekly Recap: Sep 4-8, 2023

The U.S. dollar had a remarkable week, supported by reports highlighting the robustness of the U.S. economy in contrast to the global situation. This has bolstered the case for an impending Federal Reserve interest rate hike.

Meanwhile, the Canadian dollar, often referred to as the Loonie, closely trailed the U.S. dollar's performance. This was primarily driven by a substantial increase in oil prices and an unexpectedly strong jobs report from Canada.

In case you missed the noteworthy developments in the foreign exchange market, here's a concise recap of the crucial highlights from last week's FX activity:

USD Pairs

 The U.S. dollar had a prosperous week, with several factors attracting buyers to the currency. One significant factor was the People's Bank of China's decision to establish a higher reference rate for USD/CNY. Additionally, a weak Chinese Services PMI report prompted many traders to favor the U.S. dollar.

Furthermore, the U.S. showcased its resilience in comparison to the global economy. This was evident through a U.S. Services PMI reading that exceeded expectations, reinforcing the notion that the U.S. is maintaining its economic strength while other regions grapple with economic slowdowns. This strength was further validated by positive U.S. weekly initial jobless claims data released on Thursday.

Bullish Headline Arguments

Cleveland Fed President Loretta Mester suggested on Tuesday that interest rates might need to be increased slightly, while acknowledging that there is still time to assess upcoming data before deciding.The ISM Services PMI for August surpassed expectations, reaching 54.5 (compared to a forecast of 52.5 and a previous reading of 52.7). Notably, the Employment Index surged from 50.7 to 54.7, and the Prices Index increased from 56.8 to 58.9.Weekly initial jobless claims in the U.S. decreased to 216K, surpassing the forecast of 239K and the previous figure of 229K.Unit labour costs in the nonfarm business sector for Q2 2023 rose by 2.2%, reflecting a 5.7% increase in hourly compensation and a 3.5% increase in productivity.Bearish Headline Arguments

Federal Reserve Governor Christopher Waller indicated that the Fed could adopt a cautious approach to interest rates, especially given recent data showing a decrease in inflation.S&P Global Services PMI for August came in at 50.5, down from 52.3 in July, suggesting that businesses are beginning to perceive a decline in post-pandemic economic strength. The report also noted renewed upward pressure on energy, fuel, and transportation costs.The trade balance for July 2023 revealed a deficit of -$65 billion, compared to a deficit of -$63.7 billion in June 2023.FOMC member Lorie Logan suggested that another interest rate hike could be appropriate in September, although her base case is that there is still work to be done to combat excess inflation.EUR Pairs

 Despite ongoing indications of a slowdown in business activity within the Eurozone services sector, the euro managed to emerge as a net gainer for the week. The relative strength of the euro during this period can likely be attributed to the prevailing risk-averse sentiment, as there were no notable positive developments emanating from Europe throughout the week.

Bullish Headline Arguments

In August, Spain's Unemployment Change increased by 0.93% month-on-month, adding 24.8K to the total number of unemployed individuals, which is the lowest level since August 2008.Joachim Nagel, the President of the Bundesbank, expressed openness to raising reserve requirements after the ECB ceased paying interest on them starting September 20.The latest ECB Consumer Expectation Survey indicated a rise in inflation expectations.France saw a payroll employment change in Q2 2023 of +0.1% quarter-on-quarter, in line with expectations, compared to +0.3% quarter-on-quarter in the previous period.Bearish Headline Arguments

HCOB's Germany Services PMI for August was significantly weaker at 47.3, compared to 52.3 in July. This decline was attributed to falling workloads and subdued business expectations, which negatively impacted job creation in the service sector during August.The HCOB Eurozone Services PMI Business Activity Index for August stood at 47.9, down from 50.9 in July. The rate of contraction in new contracts was the sharpest in two-and-a-half years, and input prices rose at the fastest rate in three months.Germany's trade surplus narrowed from €18.7 billion EUR to €15.9 billion, missing the forecast of €17.6 billion in July. This was due to a 0.9% month-on-month decrease in exports, coupled with a 1.4% month-on-month increase in imports.The Sentix Investor Confidence Index for September was -21.5, down from -18.9 in the previous period.German factory orders experienced a significant decline of 11.4% month-on-month in July, which was much larger than the expected 4.3% decrease and the previous 7.6% gain (upgraded from the initially reported 7.0% figure).Mario Centeno, a member of the European Central Bank Governing Council, issued a warning about the risks associated with raising interest rates excessively.In July, the Euro area Producer Price Index (PPI) declined by -0.5% month-on-month, missing the forecast of -0.8% and down from -0.4% in the previous month.Euro area retail trade volumes for July 2023 showed a decrease of -0.2% month-on-month and -1.0% year-on-year.German industrial production dropped by 0.8% month-on-month in July, which was higher than the estimated 0.4% dip and the previous 1.5% decline.The final reading for Euro Area Q2 2023 GDP showed a growth of 0.1% quarter-on-quarter, missing the forecast of 0.3% and remaining consistent with the previous quarter's growth of 0.1%. Employment change was also at 0.2% quarter-on-quarter, in line with forecasts but lower than the previous quarter's 0.5% growth.GBP Pairs

 After an initial upward movement favouring the bulls, the British Pound underwent a directional shift towards the downside. This change closely aligned with the release of a discouraging U.K. Services PMI update on Tuesday. Despite the data surpassing expectations, it marked the first instance of a contractionary survey since early 2023, underscoring a slowdown in various aspects, including employment and input price conditions.

However, the bearish sentiment gained significant momentum on Wednesday during the Bank of England's testimony to U.K. lawmakers. This shift in sentiment was likely triggered by remarks suggesting that there might no longer be a need for additional interest rate hikes.

Bullish Headline Arguments

Retail sales, as reported by the BRC, showed substantial growth, increasing from 1.8% to 4.3% year-on-year in August. This exceeded the consensus forecast of a 2.2% increase, indicating a robust surge in consumer spending.Bearish Headline Arguments

The S&P Global / CIPS UK Services PMI for August registered a value of 49.5, down from 51.5 in July. Despite remaining relatively strong, this decline in the index, along with decreasing Employment and Input Prices Indexes, suggested a downward trend.During the Bank of England Monetary Policy hearings with the U.K. Parliament, BOE Governor Bailey's statements on Wednesday indicated a shift away from the previous clarity regarding the necessity for rate hikes. He emphasized that it was no longer evident that rate increases were required, and that the current policy stance is restrictive.The Halifax House Price Index (HPI) experienced a significant decline of -1.9% month-on-month in August, compared to -0.4% in July. This marked the most substantial drop since November of the previous year, contrary to the estimated -0.1% decrease, likely influenced by the impact of higher interest rates.CHF Pairs

 The Swiss franc displayed a mixed performance throughout the week, as Switzerland's recent economic indicators, encompassing GDP and the unemployment rate, turned out to be somewhat underwhelming. This might appear contradictory to the prevailing cautious sentiment in the market. Nonetheless, the Swiss franc managed to outperform four out of its seven major counterparts. This observation implies that, once more, the overarching sentiment of risk aversion remains influential in shaping the financial landscape.

Bearish Headline Arguments

The GDP data revealed that economic activity remained stagnant in the second quarter, which was below the expected 0.1% quarter-on-quarter growth and the previous 0.3% expansion.The unemployment rate for August stood at 2.0%, slightly exceeding both the forecast and the previous rate of 1.9%.AUD Pairs

 The Australian dollar encountered substantial losses at the beginning of the week, primarily due to two key events. First, the release of disappointing Chinese Services PMI data on Tuesday had a negative impact. This was closely followed by the decision of the Reserve Bank of Australia to maintain unchanged interest rates.

Notably, the RBA not only opted to refrain from raising interest rates but also recognized that the era of elevated inflation may have already reached its zenith.

Bullish Headline Arguments

Australia's ANZ job advertisements surged from a revised 0.7% month-on-month increase in July to 1.9% in August, suggesting improved prospects for future hiring.Chinese property developer Country Garden Holdings managed to avert default by paying $22.5 million in coupons, although it is still seeking extensions for payments on seven more onshore bonds, extending them by three years.Australian GDP grew by 0.4% quarter-on-quarter in the second quarter of 2023, surpassing the estimated 0.3% expansion. Moreover, the growth rate for the previous quarter was revised upward from the initially reported 0.2% increase to 0.4%.Bearish Headline Arguments

The MI inflation gauge in Australia decelerated from a 0.8% month-on-month increase in July to 0.2% in August, indicating a weakening of inflationary pressures.Australia's company operating profits took a significant hit, declining by 13.1% quarter-on-quarter in the second quarter, contrary to the estimated 0.1% dip and the earlier 1.3% gain.Chinese Caixin services PMI decreased from 54.1 in July to 51.8 in August, falling short of the estimated 53.6 figure. This reflected the slowest pace of growth in eight months.The RBA chose to maintain its interest rates at 4.10% while suggesting that "further tightening may be needed." However, it also noted that inflation might have already peaked and expressed concerns about uncertainties affecting the economic outlook.Australia's trade surplus narrowed to 8.04 billion AUD in July due to a 2.0% decline in exports and a 2.5% increase in imports.China's trade surplus decreased from $80.6 billion to $68.4 billion in August, with both imports and exports experiencing declines once again.CAD Pairs

 The Canadian dollar saw substantial gains over the course of the week, driven by several key factors. Firstly, the increase in oil prices was a significant contributor, which resulted from the decision by Saudi Arabia and Russia to extend oil production cuts. Furthermore, the recent statement from the Bank of Canada regarding their monetary policy clearly indicated their readiness to raise interest rates if the need arises.

The week culminated with a surprisingly strong Canadian jobs report, suggesting that the Bank of Canada may need to contemplate additional rate hikes in the foreseeable future.

Bullish Headline Arguments

The Bank of Canada kept its target for the overnight rate and deposit rate steady at 5.00% as expected during the week. They acknowledged signs of excess demand easing but emphasized their readiness to raise the policy interest rate further if the need arises.Canada's merchandise trade deficit with the world decreased from a revised -C$4.9 billion in June to a deficit of -C$987 million in July.The Ivey Purchasing Managers' Index (PMI) for August posted a reading of 53.5, up from 48.6 in the previous period. The Prices Index also increased to 66.7 from 65.1, while the Employment Index rose to 54.8, compared to 54.2 in July.In a speech delivered in Calgary, Alberta, the Governor of the Bank of Canada, Mr. Macklem, suggested that one possible reason for inflation persisting above the target is that "monetary policy is not yet restrictive enough," aside from the delayed impact of higher interest rates.The Canada Employment Change for August 2023 reported an increase of 39.9K jobs, exceeding the forecast of -8.0K and the previous month's -6.4K. The Unemployment Rate was 5.5%, lower than the forecasted 5.7%, and Average Hourly Wages showed a growth of 5.2% year-on-year, surpassing the 4.8% forecast.Bearish Headline Arguments

Labor Productivity declined for the fifth consecutive quarter, recording a -0.6% quarter-on-quarter decrease, which was more negative than the forecasted -0.3% and the previous quarter's -0.8% decline.Building Permits for July showed a decrease of -1.5% month-on-month, falling short of the 1.9% forecast and significantly lower than the 7.5% increase recorded in the previous month.NZD Pairs

 The New Zealand dollar ended the week with a mixed performance, signalling a slight improvement after a week mostly dominated by losses.

Remarkably, there were no noteworthy developments or headlines originating from New Zealand during this timeframe. Instead, it appeared that the dominant factor driving market sentiment was the broader risk-off sentiment. This sentiment was notably influenced by a series of discouraging updates from China throughout the week.

Bullish Headline Arguments

The Terms of Trade for the quarter ending in June 2023 showed a 0.4% quarter-on-quarter increase, surpassing the forecasted -1.4% and the previous quarter's -1.5% decline.Global Dairy Prices experienced a rise of +2.7% in the latest auction, reaching $2,888.Bearish Headline Arguments

Commodity prices recorded a decline of 2.9% month-on-month in August, primarily due to lower prices for dairy and lamb products. This followed a previous slump of 2.6%.JPY Pairs

 The Japanese yen faced a demanding week, marked by a succession of economic reports consistently highlighting an economic slowdown. This overarching theme took centre stage in the financial landscape throughout the week.

Furthermore, officials from the Bank of Japan made it explicitly clear that they were not prepared to alter their current monetary policy stance. Their determination to maintain the status quo resembled that one friend at a party who insists on staying until the DJ plays their favourite song. Consequently, despite signs of increasing costs in the business sector, the easy monetary policy remained firmly in place.

Bullish Headline Arguments

The au Jibun Bank Japan Services PMI for August stood at 54.3, an improvement from 53.8 in July. The report noted stronger consumer spending and increased customer numbers, especially from overseas. However, it also highlighted that average cost burdens continued to rise significantly.Japan's Finance Ministry's Kanda emphasized the importance of currency movements reflecting fundamentals and expressed a willingness to consider various options if speculative currency moves persisted.Bank lending in Japan saw a notable increase of 3.1% year-on-year in August, surpassing both the expected 2.8% and the previous month's 2.9%.The current account surplus expanded from 2.35 trillion JPY to 2.77 trillion JPY in July, exceeding the forecast of 2.24 trillion JPY. This expansion was attributed to lower crude oil prices, which helped reduce imports.Bearish Headline Arguments

Household spending continued to decline, with a 5.0% year-on-year drop in August, worsening from the earlier 4.2% decline to a 2.4% decrease.BOJ official Nakagawa argued that it was appropriate to maintain an easy monetary policy because the Japanese economy had not yet reached the stage of achieving the inflation target in a stable and sustainable manner.The Leading Economic Index fell to 107.6, missing the forecast of 109.2 and down from the previous reading of 108.8.The final GDP figures were revised lower from 6.0% year-on-year to 4.8% year-on-year in Q2, primarily due to weak capital spending.Cash earnings increased by 1.3% year-on-year in July, falling short of the expected 2.4% and the previous month's 2.3%. Real wages, on the other hand, declined by 2.5% year-on-year, marking the 16th consecutive monthly decline.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.