An anxiety-ridden day aheadThe dollar is going from strength to strength as the market anxiously awaits news from the FOMC just after Putin gives an update on Russia.
- The dollar index hit yet another 20-year high in early Wednesday morning trading to take its YTD gains to nearly 17% – most of that since Russia invaded Ukraine on February 24 – while the greenback continues to hit new highs against other currencies too.
- Speaking of the war, Vladimir Putin announced a partial military mobilization in Russia on Wednesday that will see 300k citizens drafted to fight. The announcement proved there’s no end in sight for the war just yet, sending crude oil and natural gas futures ticking up on supply concerns.
- The elephant in the room this week is rate hikes. The Fed is expected to implement a jumbo rate hike of between 75bps and 100bps today after inflation rose in August – the yield on 10-yr govt debt pushed above 3.5% for the first time since April 2011 as investors sell bonds in preparation, and the yield on the 2-yr note hit a 15-year high.
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The Fed effectThe dollar is steamrolling its way through the FX market with such strength that government officials from around the world are having to get vocal about it.
- The dollar index is trading around a 20-year high as the greenback extends its 2022 rally that’s seen gains of 15%. The hawkishness of the Fed is igniting faith in the currency, with the central bank (who’s one of the more aggressive toward inflation globally) now widely expected to implement a rate hike of between 75bps and 100bps in September after seeing an increase in inflation in August.
- Currencies from around the world are at multi-year lows and officials are starting to get involved. The South Korean won is at its lowest levels since 2009 and has declined 17% against the dollar YTD, prompting its president to discuss a currency swap with J-Biddy. The South African rand was near to the worst emerging-market performer on Thursday, and sterling is at a 35-year low. Talk about a rampage.
- Markets across the Asia-Pacific have been in particular focus, with the South Korean won and Japanese yen faring particularly badly. China’s yuan continues to slide below key support levels, and the weak economy is affecting the metals market too bc China is usually one of the world’s largest metal consumers – the S&P Metals and Mining ETF is down 15% in the last 6 months.
Illustration by TradingView
Currencies caper around the chartsInvestors are riding the green dragon all the way to an inflation haven as other currencies fall to new lows against the almighty dollar amid Fed speculation.
- The dollar index hurtled to a 20-year high on Thursday after lifting 0.87% in its best day in over a month to start September on a bullish note after finishing August up 2.7% – the currency has seen gains every single month this year except May and the index is now up 13.67% YTD.
- Other currencies have not been nearly as lucky, however. The Japanese yen hit a 24-year low against the dollar on Thursday, sterling had its biggest slump against the dollar since 2016 in August, and the euro just fell back below parity with the greenback – Zambia’s kwacha was the best performing against the dollar on Thursday, up around 18% YTD to hit a 21st century high after getting a $1.3bn IMF bailout.
- Economic data fanned the Fed’s flames on Thursday and contributed heavily to the dollar’s strength. New unemployment data that showed a resilient economy consistent with tight labor market conditions and growing manufacturing activity – that’s not what the Fed is trying to achieve, so (together with J-Pow’s Jackson Hole speech) points to a hawkish September hike.
Illustration by TradingView
The hawks swoop inNew data prompts concerns over the health of the US private sector and sends the dollar retreating from its two-decade high.
- Turns out business activity in the US is on the decline. New data from the S&P’s service sector purchasing managers’ index (PMI), which basically tracks the manufacturing and services sectors, came in at a 27-month low to contradict analyst predictions and prove that business activity reduced further in August.
- What does this PMI data mean for the Fed? That’s the question on everyone's lips these days, and while we can’t tell you the answer exactly, we can say that signs of a weaker economy is exactly what the Fed is looking for to tame inflation, so the general chat is that this could mean rate hikes slow their roll in September.
- The dollar, a popular hedge, pared back from the two-decade high it hit on Monday and sank 0.41% while yields took a lil dip in early trading on the PMI data. Investors are uneasy about the Fed’s upcoming Jackson Hole conference, which is important bc so many policymakers meet to discuss the economy and it often ends up being the moment big announcements are made.
Illustration by TradingView
“Little evidence” inflation is easingThe Fed is back at it again with the hawkish meeting minutes, this time clarifying its thoughts on the market’s hottest debate rn: whether inflation is cooling.
- The short answer is… no. Well, not really anyway. The Fed’s July meeting minutes came out yesterday showing that while some officials showed concern that the rate hikes are going too far for the economy to handle, the consensus is that there’s “little evidence” inflation is actually easing and the bank looks likely to keep up the hawkish nature of the hikes in September.
- Only one sector closed Wednesday in the green after the release, with all four major US indices snapping their recent winning streaks to close down for the day. Tech was particularly hard hit, with the FAANG gang sinking around 2% after the 10-year Treasury yield moved sharply lower.
- All that being said, the odds of a 75bps hike in September dropped from 52% earlier on Wednesday to 40% after the minutes were released. That could be why the dollar (a popular hedge) pared some of its recent gains in afternoon trading, and the digital currency-verse saw losses pretty much across the board, with the overall crypto market dipping 2.25%.
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It’s headed for parityFor the first time in two decades, €1 now equals $1 – almost anyway – and there are no signs of things getting better for the struggling euro.
- The euro is less than a cent away from parity with the greenback as of early Tuesday morning trading, having now declined nearly 12% year-to-date as investors flock to the dollar as the unofficial global reserve currency – the US dollar index is up 12.7% this year and has been hitting crisp new highs nearly every day this month.
- The euro’s weakness has been driven by inflation and a weak economy, which tbf everyone is struggling with, but the European Union is the most dependent on Russian energy supplies and as a result of the invasion of Ukraine, has been especially suffering with skyrocketing prices and a cost of living crisis.
- There’s an expectation that the US will never default on its debt and will remain robust given its real interest rates are higher than elsewhere, so people are seeing it as something of a safe haven. That being said, major US indices are still struggling to digest economic headwinds, with all four opening the week sharply down.
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