Currency Outlook | September 2023
The below key drivers are likely to impact investor risk sentiment and FX markets in September:
EUR Euro
The euro fell in response to more disappointing economic data for Germany. Inflation is proving sticky for some, so experts await the ECB’s hike this week. Could rates stay unchanged or hike by 25-bps?
The euro traded down off the news that German retail sales had fallen 2.2%, much lower than the expected 1% fall.
French inflation rose in August, after dropping for three consecutive months, thanks to higher energy prices. Comparatively, Italian inflation dropped to 5.5% from 5.9% in July. Overall, the Eurozone seems to be affected differently and lags compared to other regions, which adds more difficulty to the European Central Bank’s (ECB) decision moving forward.
The German IFO Business Climate Index declined in August to 85.7 vs. the expected 86.7. The drop is the fourth decline in a row for the index and its lowest level since August 2020.
Additionally, German industrial production has fallen for the third consecutive month in July, adding further evidence that the German economy is at risk of recession. It fell by 0.8% month-on-month in July and for the year industrial production is down by 2.1% making it more than 7% below pre-COVID levels. EURUSD fell to a 3-month low recently of US$1.0686, which hasn’t been seen for the pair since early June.
Markets await the ECB’s interest rate decision on the 14th with some analysts thinking we will see a hike and others thinking rates will stay unchanged. Currently, according to Bloomberg, markets are pricing in a 34% chance of a 25bps hike.
GBP Sterling
Despite positive economic data, the pound hit lows not seen since early June. Experts foresee a further 25-bps hike towards the end of September but it could be the last for this tightening cycle.
The Bank of England (BoE) hiked by 25-bps to bring the base rate to 5.25% at the August meeting BoE Governor, Andrew Bailey stated in his speech that he didn’t “think there was a case for a 50 basis point rate rise today”.
In the build-up to the announcement, GBPUSD fell below the crucial support level of US$1.2700 and traded around US$1.2636 before recovering before the hike. Following the BoE’s increase, the pound fell again but less severely.
The UK economy showed 0.2% growth quarter-on-quarter vs. an expected 0%. Monthly GDP also printed higher at 0.5% vs. the expected 0.2%. GBPUSD (known as Cable) hit US$1.2700 level off the back of the positive news. The boost mostly came from a surge in manufacturing production in the UK. Manufacturing production rose 2.4% against an expected 0.2%.
In more positive news, BoE’s survey of businesses suggests that price pressures are falling. ING economists still foresee a hike at the September meeting but recent comments from the BoE could mean it’s the last increase in the central banks tightening cycle. Despite this, GBP reached a 3-month low of US$1.2446, the lowest level for Cable since early June.
Markets are looking out for the BoE’s next monetary policy meeting on the 21st of September which could mark the last hike from the central bank. Currently, markets have priced in a 77.5% chance of a 25-bps hike.
AUD Australian dollar
The Aussie dollar could continue to struggle in September as China’s economic data is still below expectations. Adding to AUD woes is the US dollar strength, thanks to their soft landing.
The AUD was among the worst performers through August, plunging to make fresh 2023 lows amid a triage of downward forces. Having failed to extend beyond US$0.69, the AUD reversed course after the Reserve Bank of Australia (RBA) opted to leave rates on hold. It suggested much of the ‘leg work’ had been done in controlling activity and inflation which undermines the AUD as a yield play.
With the Aussie dollar on the back foot, risk demand collapsed, thanks to worries surrounding China’s economy. A slew of weaker-than-anticipated data sets from China, the world’s second-largest economy, and a distinct lack of proactive fiscal stimulus, forced a sharp decline in global growth expectations and a retracement in the Chinese Yuan.
With the USD reaching fresh highs against the CNY, the AUD was dragged downward, pitching below US$0.65. As markets looked to haven assets, US treasury yields marched higher amid expectations that the US economy and Federal Reserve will enjoy a softer landing than first anticipated.
The promise of a shallower decline in growth forced investors to adjust expectations for a retracement in US interest rates adding further pain to the AUD. Having given up US$0.65, the AUD broke below US$0.64, touching lows at US$0.6358 before finding support.
Our attentions now turn to key US payroll and inflation data as markers of future Fed policy, while Chinese stimulus will prove critical in governing the risk narrative.
NZD New Zealand dollar
The NZD continues to struggle under the weight of domestic recession, China’s lack of economic recovery and fresh US dollar highs. September could see new lows.
The New Zealand Dollar was among the worst performers through August, plunging to fresh 2023 lows amid a triage of downward forces.
With the Reserve Bank of New Zealand (RBNZ) announcing an end to its tightening cycle, markets moved to price in a retracement in interest rates through 2024, weighing on the NZD as other major central banks appear set in at least maintaining a neutral policy setting. With the domestic economy sliding into recession, the RBNZ finds itself in the unenviable position of working to reduce inflation pressures while stimulating growth.
With the NZD on the back foot, risk demand collapsed amid worries surrounding China’s economy. A slew of weaker-than-anticipated data sets emanating from China and a distinct lack of proactive fiscal stimulus has forced a sharp decline in global growth expectations and a retracement in the Chinese Yuan.
As the USD reached fresh highs against the CNY, the NZD was dragged downward, pitching below US$0.59. As markets looked to haven assets, US treasury yields marched higher due to expectations the US economy and Federal Reserve (Fed) would enjoy a softer landing than first anticipated. The promise of a shallower decline in growth forced investors to adjust expectations for a retracement in US interest rates, adding further pain to the NZD. The NZD broke below US$0.59, touching lows of US$0.5860 before finding support.
Experts are now focused on US payroll and inflation data as markers for future Fed policy, however, Chinese stimulus will prove critical in governing the risk narrative.
With the NZD marking new year-to-date lows through early September we are watching supports at US$0.5850 as a critical marker preventing a break toward US$0.58 and US$0.57.
USD United States dollar
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August was a banner month for the USD, leading all other G10 currencies but that could continue in September. Labour market data hints at the possibility of a ‘hard landing’ scenario. Time will tell.
The US dollar continues its strong trajectory, beating all other G10 currencies in August and during the first week of September. It rallied over 5% over the Aussie dollar and Kiwi dollar, over 3% over the Canadian dollar and Japanese Yen, and almost 3% versus the Pound and Euro.
China is struggling to restore confidence after the Chinese economic recovery lost momentum, pushing the offshore Yuan to a record low against the US dollar and raising questions about whether Chinese authorities will offer more support. The offshore Chinese Yuan weakened past 7.36 per dollar, trading about 0.1% away from its all-time intraday low of 7.3749. If there is a systemic risk, the US dollar could become even stronger.
However, in the US, the “soft landing” or even “no landing” narrative is going to be tested over the following few weeks because some cracks are emerging in the labour market, which might set the US into a “hard landing” scenario. The strength in consumer spending in the US in the coming months is debatable, especially with student loan repayments due to start in October.
Interest-rate differentials have mainly driven the currency market, but the G10 central banks are near interest rate peaks; therefore, assessing the economic indicators to find indicators of rate-cut timing will be essential, especially in the US.
JPY Japanese dollar
The yen performed poorly in August, with USDJPY reaching highs not seen since November last year. There’s still high uncertainty for Japan’s economic outlook but the yen has already reached new highs this month.
In August, USDJPY recovered from 142.25 and reached a high of 147.38 at the tail end of August. The pair has now exceeded this high in early September, touching 147.82. The high is currently seen as the year-to-date high for the pair and hasn’t been seen since November 2022. According to UOB Group FX strategists, a test of 148.00 is possible in the short term.
Bank of Japan (BoJ)’s board member, Hajime Takata recently stated that the central bank needs to maintain an easy policy due to the high uncertainty for Japan. However, he added that the BoJ must be able to “respond nimbly to uncertainty with an eye on economic and price outlook” in reference to the distance still needed to achieve their 2.0% inflation target.
Vice Minister of Finance for International Affairs, Masato Kanda has once again reminded markets that they will closely monitor forex with a “high sense of urgency”. This note comes after USDJPY had its biggest daily jump in five weeks, reaching a high of 147.82.
The BoJ is due to have its monetary policy meeting on the 22nd of this month and no change is expected however, the chances of hikes are slowly increasing according to Bloomberg. Currently, there is an 18% chance of a hike in September.
CAD Canadian dollar
September could see further mixed performance of the CAD. Lower-than-expected GDP and persistent inflation means the BoC could pause rather than hike rates at the next meeting. All eyes are on the data until then.
The Canadian dollar’s performance has been mixed through August and the first week of September. It fell over 3% versus the USD and beat both the Kiwi dollar and Aussie dollar by almost 2% respectively. One catalyst was the lack of surprise from the Bank of Canada (BoC), as the overnight rate has remained at 5% since July.
The Bank of Canada’s inaction is understandable. Its monetary policy remains unchanged because the economy has shifted into an anaemic phase. For instance, Canadian GDP contracted in the second quarter by 0.2% versus an expected increase of 1.2%, and the prior number printed an increase of 3.1%. Furthermore, labour market pressure has eased.
Despite the apparent weakness in the Canadian economy, the BoC is still concerned about the persistence of inflation. It opened the door to hike even more interest rates if inflation does not return to its target. It also mentioned that weaker economic growth is needed to relieve price pressures.
Therefore, we will likely see more inaction from the BoC perhaps the rate might remain on hold for many months, at least until 2024, based on market participant expectations.
SGD Singapore dollar
The Singapore dollar may continue to be under pressure for September if China’s economic outlook remains downbeat, affecting market sentiment. Other areas to watch are Singapore’s local GDP and CPI data.
The Singapore dollar was mostly on the back foot against the US dollar for the month of August. The USDSGD reached an 8-month high of 1.3625 on 17th August 2023.
The weakness in SGD was not a standalone case as the sentiment and disappointing data coming out of China dragged down the performance of many Asian currencies. Furthermore, with the market expecting the Federal Reserve to keep its policy rates higher for longer, the yield pressure from the US weighed on the SGD as well. In the meantime, it is worth noting that Singapore’s Q2 GDP and July CPI both came in lower than prior readings.
In September, the Singapore dollar is highly likely to be under pressure should the market expectations on major central bank rate decisions remain unchanged towards either a higher or flat trajectory.
HKD Hong Kong dollar
August was a disappointing month for the Hong Kong dollar, losing July’s gains. The drop was in response to further USD strength and increased yields.
The Hong Kong dollar was down by 0.6% against the US dollar in August and closed at 7.8418, erasing all gains from the previous month.
The weakening local dollar was moving in line with the lowering local yields. Take the one-month Hong Kong Interbank Offered Rate (HIBOR) as an example, it fell from 5.31095% to 3.71691% in August, while its equivalent in the US rate moved higher from 5.10884% to 5.31135%.
On top of the yield pressure, the performance of Hong Kong’s local stock market did not appear attractive to investors either, with the Hang Seng index down by 9% on the month. The S&P 500 was only down by 1.6% in August, making it harder for the HKD to strengthen against the USD.
In September, it is likely that the HKD’s downward trend will continue. However, should the market reassess and adjust its outlook on the Federal Reserve’s policy rate decision, the HKD may get a short breather.
What a global meeting of central bankers is telling us about the economy. Read the article.
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1yAwesome guide! The narrative progression from the Daily Commentary found on the site is evident, and it's great to see the impact of currencies coming together in this outlook.