Weekly Recap July 17 – 21, 2023

Last week, the New Zealand dollar faced a decline amid concerns surrounding global economic growth and the prospect of increasing interest rates. 

In contrast, the U.S. dollar exhibited strength fuelled by strong economic data from the United States, prompting expectations of a more assertive approach by the Federal Reserve.

For those who might have overlooked the major headlines in the forex market, here's a summary of the significant developments in FX from the previous week.

USD Pairs 

During the initial days of the week, the U.S. dollar showed limited fluctuations, mainly influenced by concerns over global economic growth and optimistic expectations regarding the "peak Fed interest rate." These expectations arose following a sluggish U.S. Consumer Price Index (CPI) reading from the previous week.

However, as the United States and other major economies reported robust economic data, the Greenback steadily strengthened against various currencies. It recorded significant gains against the Japanese Yen (JPY) and currencies with higher yields, such as the New Zealand Dollar (NZD), Australian Dollar (AUD), and British Pound (GBP). Nevertheless, it saw minor gains or small losses when matched against the Swiss Franc (CHF) and Canadian Dollar (CAD).

Bullish Headline Arguments

In July, the NY Manufacturing Index came in at 1.1, beating the forecast of -6.0 and the previous reading of 6.6. Additionally, the employees index showed improvement, rising to 4.7 from the previous -3.6, while the prices paid index declined to 16.7 from 22.0.

Retail Sales for June increased by 0.2% month-on-month, meeting expectations, with core retail sales also in line with forecasts at 0.2% month-on-month.

The NAHB Housing Market Index rose to 56 in July from 55, indicating increased demand for new construction due to the scarcity of resale inventory.

Initial jobless claims for the week ending July 15 came in at 228K, below the forecast of 242K and the previous reading of 237K. The four-week moving average also decreased by 9.25K to 237.5K, indicating a positive trend in the labour market.

In July, the Philly Fed Manufacturing Index was at -13.5, showing a slight improvement compared to June's reading of -13.7.

Bearish Headline Arguments

Industrial Production for June declined by 0.4% year-on-year, missing the forecast of 0.5% and falling short of the previous reading of 0.2%.

Building Permits for June came in at 1.44M, slightly below the forecast of 1.46M, though the previous figure was revised higher to 1.5M. Home starts fell by -8.0% month-on-month, but the data still indicated pre-pandemic levels and was better than expected.

Existing Home Sales for June decreased by -3.3% month-on-month, missing the forecast of -1.2% and lower than the previous reading of 0.2%. The decline was primarily attributed to an extremely low inventory of used homes.

EUR Pairs 

The euro's performance during this period was primarily driven by external factors, as there were limited catalysts to reassess expectations for an interest rate hike by the European Central Bank (ECB). Eurozone data had only a minor impact on its fluctuations.

On Tuesday, the euro received some support after ECB Governor Council member Klaas Knot suggested that a September rate hike was not yet confirmed.

Among various currencies, the euro displayed its strength most prominently against the New Zealand Dollar (NZD), Japanese Yen (JPY), British Pound (GBP), and Australian Dollar (AUD). However, it experienced losses when compared to the Swiss Franc (CHF), U.S. Dollar (USD), and Canadian Dollar (CAD).

Bullish Headline Arguments

ECB Governing Council member Klaas Knot suggested that monetary tightening beyond the upcoming meeting is uncertain, indicating that officials may soon pause their ongoing campaign of interest-rate hikes.

Euro-area annual inflation in June 2023 met expectations at 5.5% year-on-year, while core inflation exceeded forecasts at 5.5% year-on-year compared to the previous reading of 5.3% year-on-year.

Germany's producer prices edged up by 0.1% year-on-year in June, the lowest since November 2020, surpassing the forecast of 0.0% and the previous reading of 1.0% year-on-year.

Euro Area Flash Consumer Confidence for July 2023 improved by 1 point to -15.1, continuing its gradual recovery since reaching low levels around -30 in 2022.

GBP Pairs

Throughout the week, the British pound encountered minimal fluctuations and moved in line with the overall market sentiment, largely influenced by the release of the U.K.'s CPI data, which indicated notable slowdowns in June.

Amid speculations of a less hawkish approach by the Bank of England (BOE), the U.K.'s bond yields declined, resulting in reduced demand for GBP during the latter part of the week.

As the week concludes, it is expected that the British pound will exhibit a lower value when compared to its major counterparts, except for the New Zealand Dollar (Kiwi) and the Japanese Yen (JPY), against which it may have fared relatively better.

Bullish Headline Arguments

Decreasing fuel prices caused the U.K.'s consumer prices to drop from 8.7% year-on-year to 7.9% year-on-year in June. Core CPI also eased from 7.1% year-on-year to 6.9% year-on-year.

Factory gate prices saw a decline from 2.7% year-on-year in May to 0.1% year-on-year in June, marking the lowest rate since December 2020.

Bearish Headline Arguments

Retail sales for June increased by 0.7% month-on-month, falling short of both the forecast and the previous reading of 0.1% month-on-month.

CHF Pairs

The movement of the Swiss Franc (CHF) in the week was largely influenced by factors beyond significant Swiss data releases. Instead, it relied on overall risk sentiment and the flow of other currencies to determine its direction.

In the initial part of the week, the Swiss franc's safe-haven status bolstered its strength against riskier currencies like the New Zealand Dollar (NZD), British Pound (GBP), Australian Dollar (AUD), Euro (EUR), and even the Canadian Dollar (CAD).

However, as robust economic data from the U.S. enhanced its appeal as a safe-haven asset, the CHF experienced a slight decline during the week. Investors turned to the U.S. dollar as a more attractive safe haven against higher-yielding currencies, leading to some retracement of the CHF's earlier gains.

Bearish Headline Arguments

In June, the trade surplus of Switzerland narrowed from 4.4 billion CHF to 3.3 billion CHF, as exports declined by 1.7% month-on-month, while imports increased by 3.7%.

AUD Pairs

At the beginning of the week, the Australian Dollar (AUD) faced declines, primarily driven by concerns surrounding both Chinese and global economic growth.

Fortunately for AUD bulls, a somewhat hawkish tone in the Reserve Bank of Australia's (RBA) meeting minutes and unexpectedly strong labour data for June in Australia provided some relief, allowing the commodity currency to recover some of its losses throughout the week.

However, the release of robust initial jobless claims data from the U.S. shifted the market sentiment. Speculations about the Federal Reserve's ability to maintain higher interest rates and potentially implement more rate hikes had an adverse effect on risk assets like AUD. Consequently, the Australian dollar relinquished its gains against the Euro (EUR), Swiss Franc (CHF), U.S. Dollar (USD), and Canadian Dollar (CAD).

Bullish Headline Arguments

China's industrial production grew by 4.4% year-on-year in June, surpassing expectations of 2.5% and outperforming the May figure of 3.5%.

China's fixed asset investment increased by 3.8% year-to-date year-on-year, higher than the forecast of 3.4% and the previous reading of 4.0% in May.

RBA's July meeting minutes revealed that the Board agreed that "some further tightening may be required" and hinted at the possibility of revisiting the rate hike move at the August meeting.

The Conference Board Leading Economic Index showed a growth of 0.1% month-on-month in May, following a 0.3% decline in April.

The MI leading index improved from -1.01% to -0.51% in June. Expectations of a prolonged RBA rate hike pause contributed positively, while a subdued growth outlook had a negative impact.

Australia added a net of 32.6K jobs in June, surpassing the forecast of 15K and the previous reading of 76.6K. The unemployment rate declined from 3.6% to 3.5%, with the participation rate slightly lower at 66.8%.

PBoC raised a parameter on cross-border corporate financing under its macro-prudential assessments (MPA) to 1.5 from 1.25, allowing companies to borrow more overseas in proportion to their assets.

China's National Development and Reform Commission Deputy Director Li Chunlin announced that two new policies to support non-state-owned businesses would be launched soon.

The quarterly NAB survey indicated a 1-point rise in business confidence to -3, while business conditions dropped 8 points to +9, as businesses "moderated considerably" in Q2.

Bearish Headline Arguments

China's GDP growth in Q2 2023 was 0.8%, slower than the 2.2% quarterly growth in Q1. The annual GDP growth rate was 6.3%, faster than Q1's 4.5% increase but slower than the expected 7.1% growth.

China's retail sales decelerated from 12.7% to 3.1% year-on-year in June.

CAD Pairs

Thanks to positive Canadian economic data releases and an increase in crude oil prices, the Canadian Dollar (CAD) largely ignored the prevailing risk aversion sentiment and traded higher against its major counterparts.

Bullish Headline Arguments

Foreign investment in Canadian securities for May amounted to C$11.2 billion, surpassing the forecast of -C$2.5 billion and the previous figure of C$12.7 billion. Canadian investors reduced their holdings of foreign securities by $2.8 billion in May, following their acquisition of $2.4 billion worth in April.

Wholesale sales (excluding petroleum, petroleum products, other hydrocarbons, oilseed, and grain) rose by 3.5%, meeting expectations, and improving from the previous reading of -1.4%, to reach C$83.6 billion in May.

The Consumer Price Index (CPI) for June 2032 showed a year-on-year increase of 2.8%, falling slightly below the forecast of 3.0% and the previous reading of 3.4%. This decrease was primarily influenced by lower energy costs, which reached a 27-month low. Core CPI also declined to 3.2% year-on-year, compared to the forecast of 3.6% and the previous reading of 3.7%.

The Industrial Product Price Index for June recorded a month-on-month decline of -0.6%, missing the forecast of 0.1%, but consistent with the previous reading of -0.6%. The Raw Materials Price Index was -1.5% month-on-month, below the forecast of -0.4%, but an improvement from the previous reading of -5.0%.

Housing starts in June amounted to 281K, surpassing the forecast and the previous figure of 200K.

The New Housing Price Index for June increased by 0.1% month-on-month, beating the forecast of -0.1%, and remaining consistent with the previous reading.

Bearish Headline Arguments

Retail sales for May 2023 increased by 0.2% month-on-month, falling short of the forecast of 0.5%, and lower than the previous reading of 1.0%. Core retail sales remained stagnant at 0.0% month-on-month, missing the forecast of 0.3%, and lower than the previous reading of 1.2%.

NZD Pairs

During last week, the New Zealand dollar encountered notable declines primarily driven by profit-taking following the gains it had experienced in previous weeks. Additionally, overall risk aversion in the market and the increased likelihood of other major central banks considering interest rate hikes further contributed to the NZD's losses.

Throughout the week, the NZD was consistently sold off, except for certain instances. These exceptional cases occurred when New Zealand reported a relatively high inflation update for Q2, when Australia released a strong and hawkish jobs report, and when China implemented measures to stimulate its economy. Despite these specific positive developments, the NZD remained under pressure and experienced significant losses during the overall trading period.

Bullish Headline Arguments

Inflation increased by 1.1% quarter-on-quarter in Q2 2023, compared to 1.2% in Q1 and an expectation of 0.9%. The annual Consumer Price Index (CPI) decreased from 6.7% to 6.0% in Q2, primarily due to lower petrol prices and higher interest rates.

Bearish Headline Arguments

The Services Purchasing Managers' Index (PMI) fell to 50.1 in June, missing the forecast of 52.5, and declining from the revised previous reading of 53.1. The Employment Index dropped to 49.1 from the previous reading of 52.3, while New Orders dipped to 51.3 from the previous reading of 55.4.

JPY Pairs

Like other safe-haven currencies, the Japanese Yen (JPY) saw a rise in value in the initial days of the week, buoyed by risk aversion sentiment prevailing in the market.

Nevertheless, the yen's allure diminished against its major counterparts as Bank of Japan (BOJ) members held on to their hawkish stance, even with a slightly higher national core CPI.

On Tuesday, as investors turned more risk-seeking, the JPY weakened, and this trend continued gradually throughout the week, causing a decline in value against all major currencies except for the New Zealand Dollar (NZD).

Bullish Headline Arguments

In June, Japan posted its first annual trade surplus in 23 months, with exports growing by 1.5% year-on-year, while imports declined by 12.9%.

Bearish Headline Arguments

BOJ Governor Kazuo Ueda suggested the possibility of extended ultra-loose monetary policies, stating that the central bank's overall narrative on monetary policy remains unchanged if the prospect of sustained 2% inflation remains distant.

Japan's National Core CPI for the reported period showed a year-on-year increase of 3.3%, slightly higher than the forecast and the previous reading of 3.2%.

The Japanese government downgraded its economic outlook on Thursday, revising it from 1.5% to 1.3% for the fiscal year ending March 2024. However, it raised its 2023 consumer price inflation forecast to 2.6% from the previous estimate of 1.7%.

Sources familiar with the Bank of Japan indicated that the central bank is likely to maintain steady yield control in the upcoming week.

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