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

USD

The US dollar secured another week of upside, concluding a fifth week of gains thanks to positive data reports and a hawkish Federal Reserve. Also, Chinese economic woes have triggered the influx of investors towards the haven US dollar with news of Evergrande filing for bankruptcy as it battles a debt crisis heaps more pressure on the economy.

The US economy has continued to woo investors with improved economic data reports reducing the idea of a recession amidst future rate hike bets. The US retail sales jumped to 0.7% in July (from 0.3%), while the core retail sales hit 1%. More support for the US dollar came when the Federal Reserve released minutes of its July meeting, remaining committed to its monetary policy campaign. The dollar response signalled a clear feeling that the FOMC were more hawkish than expected. Lastly, the weekly unemployment claims report showed a decline as 239,000 individuals filed for claims.

This week investors will focus on the Jackson Hole symposium as comments from key central figures will incite market volatility. Friday’s appearance from Jerome Powell will be the one to watch, with the dollar likely to see heightened volatility as markets gauge implications for future monetary policy. Also, a raft of PMI surveys will be monitored as the dollar seeks to stretch its gains into the new week.

EUR

The euro has not improved from where we left it and could eventually slip as data reports have not been encouraging. The single currency has been on the drop since the ECB’s dovish signal on future rate hikes. Plagued by a war between Russia/Ukraine, the euro economy continues to feel inflationary pressure as the price of energy remains high. The week has started with a fresh jump in EU gas, highlighting the potential for an inflationary resurgence if we see energy prices rise once again.

Inflation has been a major worry for the ECB and with the central bank not clear on the next decision it will make at its next policy meeting, analysts have warned that further rate hikes will finally see the euro economy enter a recession. Already, economic growth in the US economy has made the euro less attractive to investors, piling more pressure on the currency.

Looking ahead, the euro will be hoping to redeem itself when the PMI reports come in and the EU gives an update on its economic forecast. The Jackson Hole Symposium could also hand in some relief for the euro should the US dollar get derailed by dovish comments.

GBP

The pound has remained well bid over the course of the past week, with the bulls back in charge after a more changeable period. The release of jobs data provided a warning sign of ongoing inflation pressures, with average earnings rising to a worrying 8.2% in August. While we saw headline inflation fall back on Wednesday, the static core CPI figure of 6.9% highlights an environment where higher interest rates appear to be making little difference to the less volatile side of consumer prices. While weakening PPI figures seen elsewhere encourage the idea of an impending collapse in inflation, the UK’s reliance on the services sector instead highlights a reason to be concerned as wages drive higher.

The inflation differential seen between the UK and the rest of the developed world brings the potential for further sterling strength. This week has kick-started with a -1.9% Nationwide HPI decline, signalling impending weakness in the housing sector. With asset values declining as mortgage costs and rent shift upwards, consumption will likely take a hit. Therefore, weakness in the housing sector could be an initial requirement that leads demand, and thus inflation lower. Keep a close eye out for additional signals on the UK housing perspective.

This week sees manufacturing and services sector PMI surveys released on Wednesday, with both expected to shift lower as the economy comes under pressure. Both include a breakdown of input pricing within the respective sectors, providing a leading indication for UK inflation going forward.

CAD

The Canadian dollar struggled this week as energy prices weakened in response to Chinese economic struggles. With the latest inflation reports coming out hotter than expected, increasing the chances of more rate hikes from the BOC, the commodity-based currency failed to lift as oil prices dropped. The commodities markets have been hit hard by the news of economic troubles in China with oil price losing about $2 of its value at the end of the trading week. China is the second largest consumer of crude oil, with ongoing economic concerns subsequently impacting the demand outlook. Further Chinese weakness could yet hurt energy prices and thus the CAD.

The recent inflation report showed the economy is still boiling despite the Bank of Canada’s monetary tightening campaign. The monthly CPI figure accelerated to 0.6% while the annual CPI jumped from 2.8% to 3.3%. With Core inflation remaining stable at 3.2%, we appear to have seen the end of the disinflationary path for the time being.

This week, we could still see the same narratives impact the CAD with eyes on the retail sales report which will shed more light on consumer activity. A strong retail sales figure could signal a strong demand picture that in turn lifts inflation. Meanwhile, a weaker retail sales reading would make it more likely that the BoC keeps rates steady after their latest 25-basis point hike.

AUD

The Australian dollar has been hit hard over the past week, with a stream of worrying Chinese news stories bringing little reason for optimism for a country that is hugely reliant upon exports to the Asian powerhouse. This week has been kick-started by an underwhelming rate cut from the PBoC, falling short of expectations. For the AUD, this provides a fresh signal that the Chinese are unwilling to enact a major bout of stimulus quite yet.

The decision to keep rates steady at the RBA this month served to keep the Aussie dollar under pressure, with the data dependant outlook signalling that we are likely to see rates stay flat at their next meeting. After-all, last week brought a lower-than-expected wage reading, while employment contracted by the highest pace in a year. Minutes signalled an optimism that the 400 basis points worth of hikes are yet to be fully felt by the Australian economy, and thus they look likely to hold off in anticipation of further downward pressure for inflation.

Keep an eye out for the latest PMI surveys, with any signs of further weakness likely to drive further AUD downside given the implications for RBA monetary policy. With economic concerns both home and abroad (China) playing into thinking at the RBA, the new governor Michelle Bullock looks unlikely to mark her first meeting in charge with anything but a hold.

NZD

The New Zealand dollar has similarly been under pressure as its correlation to the AUD and concerns over the Chinese economic outlook serve to sour sentiment. That has led the NZDUSD into a nine-month low, as recent risk-off sentiment further dented confidence around a currency that is typically perceived as pro-cyclical.

Last week saw the RBNZ hold rates steady as expected, marking two consecutive such decisions. The bank continues to see current policy as being restrictive for the economy, with the current cash rate of 5.5% well above their Australian neighbours (4.10%). They similarly remain data dependant, and thus it will be important to track the trajectory of the economy and inflationary environment.

Retail sales data due this week should provide an insight into quite how much the current interest rate environment is restricting spending power, with another quarterly decline expected. A weak reading for retail sales could put pressure on NZD given the potential impact it could have upon demand and thus inflation.