US Dollar edges higher as China’s data comes in lower than expected
The US dollar gained Monday while commodity sensitive currencies tumbled after Chinese data shows economic growth rate falls short of forecasts, giving the US dollar headway as an investor safe haven.
Chinese industrial output grew 3.8% in July from a year earlier, coming in under the anticipated 4.6% expected where retail sales rose 2.7% from a year ago against the anticipated expectation of 5%. With the missed reports and growth outlook for the second largest economy in the world shows lackluster results, the Peoples Bank of China cut it’s one-year medium-term lending facility by 10 basis points to 2.75% in a surprise move and now all eyes are on the Federal Reserve and their stance on increase and pace of the US interest rate hikes. The U.S. inflation data was weaker than expected last week fueling investor hopes that the central bank could ease back on its aggressive tightening. This puts the release of the Fed’s July meeting, on Wednesday, firmly in focus.
Statistics Canada is set to release the latest set of consumer price inflation data on Tuesday where the median estimate among economists is a 7.6 per cent year-over-year rise in July.
In June the CPI data climbed to the highest year-over-year level since January 1983. Surging gasoline costs were a big contributor to overall inflation, with prices rising 6.2 per cent on the month and 55 per cent year-over-year. After a larger-than-expected full-point interest rate hike in July, Bank of Canada Governor Tiff Macklem said he expects inflation to continue to run hot for the rest of the year.
Canadian Manufacturing sales fell 0.8 per cent to $71.8 billion in June. The move lower came as sales fell in eight of the 21 industries tracked by the agency and followed a 1.1 per cent drop in May according to Statistics Canada
Statistics Canada said sales in the petroleum and coal industry fell by 7.8 per cent in June as concerns over the global economic slowdown led to lower demand for energy products and contributed to the lower sales.
The CPI will not be the only inflationary index due this week in Canada as investors will also be keeping an eye on the industrial product and raw materials price indices due Thursday.
It is anticipated that the Bank of Canada’s hawkish stance to continue with the next anticipated increase slated for September.
Trade ranges CAD USD 1.2640-1.3135
GREAT BRITISH POUND
The UK’s economy shrank in the second quarter as the country’s cost-of-living rises. Official figures published showed that the UK gross domestic product shrank by 0.1% quarter on quarter in the second three months of the year, less than the 0.3% expected. Inflation hit a 40-year high of 9.4% in July and is expected to continue rising through to the end of 2022. Britain is expected to have the slowest growth among major industrialized nations next year as double-digit inflation and rising interest rates squeeze household spending.
Trade ranges CAD GBP 1.5321-1.5804
Investors await euro zone flash GDP and HICP inflation numbers due this week, as stocks gain to two month highs as signs of a slowing Chinese economy prompted European investors to turn to safe haven investing.
Inflation in the eurozone is continues to set record highs, hitting 8.9 per cent in July; up from 8.6 per cent in June, 8.1 per cent in May, and 7.4 per cent in April, as Europeans continue to see soaring energy and food prices fuelled in part by the war in Ukraine. The European Central Bank raised interest rates for the first time in 11 years by a larger-than-expected amount, as it targets to combat high inflation and plans to target further hikes in September.
Trade ranges CAD EUR 1.2963- 1.3293
Japanese Prime Minister Fumio has ordered the government to hold off on raising the price of imported wheat it sells to retailers in October – a move that would assist households to cope with surging commodity prices, and to come up with a package to subsidize its citizens. Chief cabinet secretary Hirokazu Matsuno said the government will aim to compile the package of measures early next month, and tap roughly 4.7 trillion yen ($35 billion) remaining in state reserves to cover the cost.
Coping with rising commodity costs has been among top priorities for Kishida’s and the administration, as Japan’s heavy reliance on imports for energy and food makes its economy vulnerable to rising global raw material prices.
High Volatility Ahead for Currency Markets: Central Banks, OPEC+ and Russian sanctions by the EU
This week is full of high risk reports that are showing high volatility ahead for currency markets as central banks meet and employment data for Canada and the US are on tap. The high volatility this week will have an impact on the currency movements throughout the week, here is our weekly market update for May 2- May 6th.
The US dollar index reaches to 103.75 on the highs on Monday as all bets are that the FED will continue with its aggressive approach to its monetary policy and tackle its soaring inflation with a market expectation of raising its interest rate this week by 50 basis points with further plans to reduce its $9 trillion balance sheet as the FED concludes its two day meeting on Wednesday May 4th. The FED hasn’t seen a rate hike increase of 50 basis points in well over 20 years. The challenge for the Fed is to raise rates without stalling the economy. Investors are already looking ahead to the June and July meetings, which are also likely to impose 50 point hikes.as well.
China’s official manufacturing purchasing managers’ index fell to 47.4 and factory activity in April showing a contraction in industrial production with disrupted supply chains as the implications of the Zero Covid China lockdown continue, raising fears of a sharp economic slowdown in the second quarter that will weigh on global growth.
Crude oil prices fell sharply in direct response to the economic data out of China and jumped back to the $105 levels on the back of the OPEC+ meeting this week. Thursday is OPEC+ meetings for output and production levels while the European Union is discussing a phase-out approach that would see Russian oil imports decline gradually until the end of the year, despite concerns that this would further boost oil prices. Decisions on sanctions need to be approved unanimously by all EU members while it is expected that both Hungary and Slovakia may veto the proposal due to their high dependency on Russian oil imports. The proposed Russian sanctions come at a time when many OPEC+ were already struggling to increase output inline with their quota hikes with targets well below the 400K targeted rise, with underproduction pinning crude prices above or near the $100 price mark for the near term.
Trade ranges CADUSD 1.2612-1.3142
GREAT BRITISH POUND
On Thursday, the Bank of England will announce its decision on monetary policy with a 25 basis point interest rate hike to 1.00% as expected in the markets. The interest rate hike, while expected all eyes and ears will be on the forward guidance as continued dovish signals from the Bank of England may likely weigh on GBP.
Trade ranges CADGBP 1.5738-1.6581
The EURO came under pressure as the European Central Bank still appear reluctant to commit to raising interest rates in July, as chief economist Philip Lane and Vice President Luis de Guindos left plenty of ambiguity in statements on the subject in their latest comments, giving little gains to the EURO on the dovish remarks, as the ECB rhetoric contrasts with the FED on their hawkish moves to support monetary policy tightening. German Retail sales fell 0.1% on the month and 2.7% on the year against the expectation of a gain of .3% as implications of the war on Ukraine affected consumer confidence.
Trade ranges 1.3241-1.3811
Japan’s economy has picked up as a trend, although some weakness has been seen in part, mainly due to the impact of COVID-19 and the rise in commodity prices but still stays quite dovish on their monetary policy and interest rates. The Bank of Japan is in no rush to raise interest rates in contradiction to other major central banks. In last weeks report, the Bank of Japan stated that it will continue to set short-term interest rates at minus 0.1 percent, while guiding 10-year Japanese government bond yields to around zero percent to support the economy, The Japanese economy will likely expand 2.9 percent in fiscal 2022, downgraded from 3.8 percent growth in the previous projection in January while target inflation of 2% may not be reached until 2023, putting more pressure on the Japanese currency.
The widening policy gap between Japan and the United States has precipitated the yen’s plunge in recent weeks. While the BOJ sticks to its ultralow rate monetary policy, the US treasury yield is nearing its 3% mark, its highest in many years.
Rising rates, continued lockdowns and commodity prices
USD CAD continues to find support from falling oil prices, with WTI dipping to two-week lows at $97.03. The extended slump in oil prices comes on the back of heightened worries over demand for oil and its products after the covid outbreaks in China. The Chinese authorities are planning to strengthen the restrictions in Shanghai while the lockdowns could extend to Beijing.
Safe-haven flows continue to dominate the financial markets with Wall Street’s main indexes trading deep in negative territory as the US Dollar continues to gain.
The Bank of Canada raised the overnight rate 0.5% last Wednesday to 1.0%, in the first 50 point jump in 22 years. The next policy meeting is June 1 with expectations of a priced in a half-point increase in the overnight rate to 1.5%. Should the Fed hike 0.5% to 1.0% on May 4 and add another 0.5% on June 15 as expected, the policy rates of the two banks would be in tandem at 1.5%.
Canadian information is sparse in the week ahead with only February GDP on tap for Friday while peeches from several BoC officials, including Governor Macklem may provide comments on policy going forward.
The USD/CAD pair gained traction for the third successive day on Monday and climbed to a six-week high, around the 1.2765-1.2770 region during the first half of the European session on growing worries of an economic slowdown in China.
Trade ranges CADUSD 1.2453-1.2928
In France, Emmanuel Macron won the presidential re-election, as widely expected by markets and political analysts. The EU is preparing further sanctions on Russia, cutting oil imports from the country which would exacerbate inflationary pressures and economic slowdown in Europe. The EUR is expected to remain in consolidation with a risk appetite as the European Central Bank to raise interest rates by 25 basis points in July.
Trade ranges CADEUR1.3527-1.3881
The Japanese yen has also been the most affected by rising U.S. interest rates, as the central bank actively keeps its benchmark yields lowered. The dollar was a tiny bit firmer on the yen on Monday morning and has gained 11% to date. The 129.4 mark hit during the previous week was the highest for the USD/JPY pair in 20 years and is eyeing a push lower towards support in the 125.00 area, should the trends of weaker equities and commodities continue.