2 Oct FX outlook – USD, EUR, GBP, CAD, AUD, NZD

USD

Despite weaker-than-expected economic reports, the US dollar closed last week as the second-best performing currency. This is due to the Federal Reserve’s policy of maintaining higher interest rates for a longer duration. In September, the dollar index, which tracks its performance against a basket of currencies, rose by approximately 2.45%, reaching a six-month high.

The economic headlines for the week were mixed for the US dollar. However, one important point to note is that the US economy is growing at a healthy rate. The decrease in consumer spending and new home sales in September can be attributed to the Federal Reserve’s monetary tightening policy, which aims to maintain price stability. However, the resilience of the US economy could sustain inflationary pressures as the latest quarterly GDP report and initial jobless claims didn’t show signs of the economy slowing down, inviting more rate hikes from the Federal Reserve.

The US dollar has started the new week with a boost after the US Congress passed a stopgap bill to avoid a government shutdown. The economic calendar for the USD will be slightly busy with the focus on the Non-Farm Payroll report. While payrolls have been declining over recent months, the flat unemployment rate figure and declining jobless claims should provide confidence over the strength of the US jobs market. Will Friday bring anything to shake that confidence? Also watch out for the average earnings figure as a proxy of inflation.

EUR

The euro’s downward spiral continued as economic uncertainty increased outflows to the US dollar. The ECB President Christine Lagarde’s remarks on Monday echoed the central bank’s decision to keep rates at higher levels for longer. However, this failed to lift the euro as weak economic data reports plunged it to fresh lows. The German IFO Business Climate and IFK consumer climate data have worsened due to high inflation and slow economic activity in the eurozone. Improved inflation reports provided temporary relief for the single currency, but the economic outlook remains uncertain. To add to the zone’s economic woes, soaring energy prices have been worsened by the Russia/Ukraine war, which is affecting supplies as winter approaches.

As we begin a new week, there is no significant economic news expected for the Euro. However, minor data reports on manufacturing and services PMI could provide some support for the currency. On the other hand, the Euro may face challenges due to the slow growth of the global economy, combined with high inflation.

GBP

The pound has been consolidating for much of the past week, coming off the back of a protracted period of downside as GBP longs unwind. The elevated nature of UK inflation has long raised expectations that the Bank of England will go over and above their peers when it comes to monetary tightening. However, the recent disinflation trend has seen the gap closed somewhat, while signs of economic distress pushed the BoE into a surprising end to their tightening phase.

Last week saw a relatively quiet economic calendar, with GBP seeing little directional volatility as a result. Instead it was more a question of judging exactly how far this GBP devaluation story would run. With market sentiment improving towards the back end of the week, we saw the pound stabilize somewhat as a result.

This week has started with a surprise 0% reading for the Nationwide HPI, pausing the house price slump that has been taking hold over much of the past year. Friday’s Halifax gauge should provide further insight into the sector, with another monthly decline widely expected. Also keep a close ey out for the construction PMI survey due out on Thursday.

CAD

The Canadian dollar lagged behind other major currencies due to the drop in oil prices towards the back end of the week. However, that came off the back of a 13-month high for WTI, breaking above the key $94 threshold. Being a commodity-based currency, it had previously benefited from the increase in oil prices that were pushed up by OPEC’s supply cuts. While rising interest rates had raised concerns around demand, we have seen that the demand-supply dynamic has been shifting as governments disincentivize production in the name of lowering carbon emissions. As such, while we have seen energy and CAD ease back since Thursday’s peak, calls for $100 crude do mean that CAD bulls are likely to remain optimistic.

Last week saw the latest Canadian GDP miss expectations, with the economy failing to grow (0.0% vs 0.1%). This increased speculations that the BOC will pause rates once again at its next policy meeting. Also, the performance of the US economy had a significant impact on the value of the Canadian dollar.

Looking forward, the Canadian dollar will look towards two particular events as drivers of volatility and sentiment. Firstly, Wednesday’s OPEC meeting provides yet another opportunity for the group to reassert their stance that output will remain restricted in a bid to drive up prices. Beyond that, Friday’s Canadian jobs report could strengthen calls for the Bank of Canada to reassess its monetary policy approach in order to steer clear of a recession. Calls for a potential rise in unemployment and a decline in the employment change metric could put pressure on the bank to remain dovish in tone.

AUD

The Australian dollar continued its upward trajectory last week, with European currencies making easy targets for AUD. Elsewhere, things are move changeable, with AUDUSD, AUDNZD, and AUDCAD largely losing ground of late. Nonetheless, with the perception of weakness in the Chinese growth story appearing to shift on a regular basis, AUD looks likely to similarly experience a somewhat mixed time across the spectrum of currencies.

Last week gave grounds to believe that the RBA could yet hike further, with the monthly CPI rising to 5.2% after three consecutive declines to this annual figure. The primary drivers of this uptick in consumer prices were Housing (+6.6%), Transport (+7.4%), Food and non-alcoholic beverages (+4.4%) and Insurance and financial services (+8.8%). Elsewhere, retail sales data came in below estimates, falling back to 0.2% after a July reading of 0.5%. In terms of China, Evergrande are back in the headlines, with their restructuring process stopping them from taking on more debt to pay off current obligations. The inability to pay down debt, coupled with the detention of founder and Chairman Hui Ka Yan, raised concerns around the Chinese housing sector once again.

This week has started with the weekend release of Caixin manufacturing and services PMI data for China. This focuses mainly on small and medium sized businesses, with both still in expansion territory. However, the services gauge did slump to 50.2, with contraction looking highly likely next month. Chinese markets are closed for the week, meaning that its influence is likely to be diminished for this national holiday week. In Australia, the week revolves around the RBA rate decision, with expectations of a fourth consecutive pause meaning that we are likely to see AUD volatility driven by commentary and outlook. This is the first meeting for new Governor Michele Bullock at the helm. As such, any shift in outlook and approach from her could drive fresh AUD volatility.

NZD

The New Zealand dollar has similarly managed to gain significant ground against European currencies of late, but its strength against AUD also serves to highlight the relative strength of NZD in the Oceania region. Interestingly, we have even seen NZDUSD break through to a 50 day high on Friday. As such, NZD represents one of the strongest currencies of late, as improvements in the Chinese trade picture and a data dependent approach from the RBNZ bringing about questions around potential further upside for interest rates.

Last week saw very little in terms of economic data out of New Zealand. However, this weekend has seen a raft of PMI releases from China, with improvements to the headlines figures negated somewhat by the Caixin manufacturing and services PMI surveys.

Looking ahead, the absence of any Chinese data should not deter those expecting NZD volatility. The RBNZ rate decision on Wednesday brings about a fresh update from the bank. The ongoing data dependent outlook means that we could see further hints of tightening to come as concerns around China appear to ease. Also watch out for the GDT price index release, with this metric for dairy prices bringing a key source of NZD volatility. The past two-weeks have seen dairy prices increase markedly, lifting export valuations. Watch out for any further movement as a driver of NZD direction.