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Dollar rallies as hope for a Fed pivot proves short-lived

5 August 2022
Jonathan Petersen Markets Economist
5 August 2022
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The huge upside surprise in US payrolls data pushed the greenback higher against most major currencies today in an otherwise quiet week for FX markets. The continued strength of the labour market in the US adds to our conviction that the Fed remains some way off from taking its foot off the brakes, a message echoed by several Fed officials earlier in the week. By contrast, many other central banks face more difficult trade-offs: the latest labour market data from New Zealand and Canada showed falls in employment; the BoE and RBA both hiked by 50bp but revised their forecasts to reflect higher inflation and lower growth; and some emerging market central banks appear to be at or near the end of their tightening cycles. Next week’s US CPI data, which we expect will show continued strong core price pressures even if headline inflation slows, could put another nail in the coffin of the ‘pivot’ narrative. Even in the absence of further divergence in monetary policy, we expect slowing global activity and worsening risk sentiment to, underpin further strength in the greenback over the rest of the year.

The huge upside surprise in US payrolls data pushed the greenback higher against most major currencies today in an otherwise quiet week for FX markets. The continued strength of the labour market in the US adds to our conviction that the Fed remains some way off from taking its foot off the brakes, a message echoed by several Fed officials earlier in the week. By contrast, many other central banks face more difficult trade-offs: the latest labour market data from New Zealand and Canada showed falls in employment; the BoE and RBA both hiked by 50bp but revised their forecasts to reflect higher inflation and lower growth; and some emerging market central banks appear to be at or near the end of their tightening cycles. Next week’s US CPI data, which we expect will show continued strong core price pressures even if headline inflation slows, could put another nail in the coffin of the ‘pivot’ narrative. Even in the absence of further divergence in monetary policy, we expect slowing global activity and worsening risk sentiment to, underpin further strength in the greenback over the rest of the year. (See our latest FX Markets Outlook here.)

All other G10 currencies weakened against the dollar this week. (See Chart 1.) The rise in US yields weighed heavily on the yen, while the Aussie dollar struggled as investors pared back expectations for further tightening following the RBA meeting.

Chart 1: Changes Vs US$ Since 29th July (%)

Sources: Refinitiv, Capital Economics

Most European currencies edged lower as weak data out of the euro-zone (as well as the BoE’s exceptionally gloomy forecasts for the UK economy) added to evidence that many European economies are headed for recession. We think recessions in the euro-zone and UK will start later this year, keeping pressure on the euro and sterling even if the ECB and the BoE continue to hike rates.

Meanwhile, the Canadian dollar and Norwegian krone weakened more than most other G10 currencies as the price of oil fell sharply after OPEC agreed to increase production. Although we think that energy prices, in general, are unlikely to fall much further as supply conditions remains tight, we think that the loonie and other commodity currencies will fall further against the dollar as global trade slows and risk sentiment remains weak.

Although most were little changed since last week, the fall in oil prices (and today’s “risk-off” sentiment) appears to have had some bearing on the relative performance of EM currencies as well. (See Chart 2.) In particular, the currencies of Brazil and Colombia, both oil exporters, were among the worst performing. Somewhat surprisingly, both the Chinese renminbi and the Taiwan dollar were unchanged since last week despite the mounting fears of escalation in the Taiwan Strait, although risk reversals indicate rising risk premia, suggesting central banks may be intervening. (See here and here). Adding geopolitical risks to an already unfavourable global backdrop for EM currencies suggests this week’s relative calm may not last.

Chart 2: Changes Vs US$ Since 29th July (%)

Sources: Refinitiv, Capital Economics

Other than US CPI, activity data from the euro-zone and the UK should shed more light on how well growth is holding up. And we expect the latest credit data out of China to show year on year credit growth was largely unchanged. Otherwise, central banks in Thailand, Mexico and Peru will announce policy.

Key Data and Events

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

7th Aug.

-

China Exports (USD, % y/y)

(+17.9%)

(+14.2%)

(+10.8%)

 

-

China Imports (USD, % y/y)

(+1.0%)

(+4.0%)

(+0.5%)

 

-

Trade Balance (USD)

+97.9bn

+88.1bn

+86.0bn

We think that sizeable backlogs kept export volumes elevated in July. But most signs point to a drop-off in global demand, so we doubt the strength in export growth will be sustained. As for imports, we think they will have remained depressed amid continued weakness in the construction sector. (See here.)

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

9th Aug.

-

China Aggregate Financing AFRE (Jul., RMB)

+5173bn

+1500b

+1775bn

 

-

China Net New Lending (Jul., RMB)

+2806bn

+1200b

+1300bn

 

-

China M2 Money Supply (Jul.)

(+11.4%)

(+11.2%)

(+11.4%)

We think year-on-year growth in bank loans and broad credit will have held steady in July as government bond issuance dropped back last month and corporate bond issuance has also softened in recent weeks. (See here.)

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

10th Aug.

07.00

UK GDP (Jun.)

+0.5%(+3.5%)

-0.9%(+1.7%)

-1.3%(+1.3%)

The extra Jubilee bank holiday in June probably caused GDP to fall by 1.3% m/m in June and by 0.2% q/q in Q2. While GDP is likely to rebound in July, we still expect a recession is on the way. (See here.)

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

10th Aug.

08.00

Thailand Policy Rate Announcement

0.50%

0.75%

0.75%

We, along with the majority of other analysts, expect a 25bp hike to the main policy rate. Further hikes seem likely later in the year and into 2023 but we are not anticipating an aggressive tightening cycle. (See here.)

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

10th Aug.

13.30

US Consumer Prices (Jul.)

+1.3%(+9.1%)

+0.2(+8.8%)

+0.2(+8.7%)

  

US Core Consumer Prices (Jul.)

+0.7%(+5.9%)

+0.5%(+6.1%)

+0.6%(+6.2%)-

We expect a 0.2% m/m rise in consumer prices in July which would be the smallest increase in 18 months, reflecting a drop in energy prices and an easing in food and core goods inflation. (See here.)

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

11th Aug.

19.00

Mexico Policy Rate Announcement

7.75%

8.50%

8.50%

We expect Banxico to deliver a second consecutive 75bp interest rate hike, to 8.50%, when the Board meets on Thursday. We think the policy rate will peak at 10.00% by year-end. (See here.)

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

12th Aug.

00.00

Peru Policy Rate Announcement

4.90%

5.40%

5.40%

We think that Peru’s central bank will raise its policy rate by 50bp, to 6.50%, next week. But with mounting signs that the economy is slowing, we only expect one final 50bp rate hike, to 7.00%, in September. (See here.)

Date

BST

Indicator/Event

Previous

Consensus

CE Forecast

12th Aug.

10.00

Euro-zone Industrial Production (Jun.)

+0.8%(+1.6%)

+0.1%(+1.0%)

+0.3%(+0.9%)

We think industrial production increased in June, but there is little reason to be optimistic about the sector in the coming months given that timelier business surveys have weakened markedly. (See here.)

Economic Diary & Forecasts

Date

Country

Release/Indicator/Event

BST

Previous*

Median*

CE Forecast*

Sun 7th

       
 

Chn

Trade Balance (Jul., USD)

-

+97.9bn

+88.1bn

+86.0bn

 

Chn

Exports (Jul., USD)

-

(+17.9%)

(+14.2%)

(+10.8%)

 

Chn

Imports (Jul., USD)

-

(+1.0%)

(+4.0%)

(+0.5%)

 

Chn

Foreign Exchange Reserves (Jul., USD)

-

+3071bn

+3051bn

+3065bn

Mon 8th

       
 

Jpn

Current Account Balance (Jun.)

00.50

¥128.4b

-¥686.1b

-¥650.9b

 

Jpn

Bank Lending (Jul., ex.trusts)

00.50

(+1.5%)

-

(+1.4%)

 

Cze

Industrial Production (Jun.)

(08.00)

(+6.3%)

(+2.1%)

(+2.6%)

 

Twn

Exports (Jul.)

09..00

(+15.2%)

(+11.0%)

(+10.5%)

 

Twn

Imports (Jul.)

09.00

(+19.2%)

(+20.9%)

(+20.0%)

Tue 9th

       
 

Chn

Aggregate Financing “AFRE” (Jul., RMB)

-

+5173bn

+1500b

+1775bn

 

Chn

Net New Lending (Jul., RMB)

-

+2806bn

+1200b

+1300bn

 

Chn

M2 Money Supply (Jul.)

-

(+11.4%)

(+11.2%)

(+11.4%)

 

Php

GDP (Q2, q/q(y/y)

03.00

+1.9%(+8.3%)

+0.3%(+7.8%)

+1.7%(+10.3%)

 

Mly

Industrial Production (Jun.)

05.00

(+4.1%)

-

(+3.5%)

 

Jpn

Machine Tool Orders (Jul., Prov.)

07.00

(+17.1%)

-

-

Wed 10th

       
 

Kor

Unemployment Rate (Jul.)

00.00

2.9%

-

2.9%

 

Jpn

PPI (Jul.)

00.50

+0.7(+9.2%)

+0.4%(+8.4%)

+0.4%(+8.4%)-

 

Chn

Consumer Prices (Jul.)

02.30

(+2.5%)

(+2.8%)

(+2.9%)

 

Chn

Producer Prices (Jul.)

02.30

(+6.1%)

(+4.9%)

(+5.1%)

 

Tha

Interest Rate Announcement

08.00

0.50%

0.75%

0.75%

 

Brz

Monetary Policy Meeting Minutes

(12.00)

-

-

-

 

Mex

CPI (Jul.)

(12.00)

+0.8%(+8.0%)

+0.7%(+8.1%)

+0.5%(+7.9%)

 

Brz

IPCA Inflation (Jul.)

(13.00)

+0.7%(+11.9%)

-

-0.3%(+10.5%)

 

US

Consumer Prices (Jul)

13.30

+1.3%(+9.1%)

+0.2(+8.8%)

+0.2(+8.7%)

 

US

Core Consumer Prices (Jul)

13.30

+0.7%(+5.9%)

+0.5%(+6.1%)

+0.6%(+6.2%)-

Thu 11th

       
 

AU

Consumer Inflation Expectations (Aug)

01.00

(+6.30%)

-

-

 

US

Producer Prices (Jul)

13.30

+1.1%(+11.3%)

+0.3%(+10.3%)

-

 

US

Core Producer Prices (Jul)

08.30

+0.4%(+8.2%)

+0.4%

-

 

Mex

Interest Rate Announcement

19.00

7.75%

8.50%

8.50%

 

NZ

BusinessNZ Manufacturing PMI

22.30

49.7

-

-

 

NZ

Consumer Food Prices (nsa, Jul.)

22.45

+1.2%

-

-

Fri 12th

       
 

Per

Interest Rate Announcement

00.00

6.00%

-

6.50%

 

Mly

GDP (Q2, q/q(y/y))

05.00

+3.9%(+5.0%)

-

+2.0%(+7.8%)

 

UK

GDP (Jun)

07.00

+0.5%(+3.5%)

-0.9%(+1.7%)

-1.3%(+1.3%)

 

UK

Industrial Production (Jun)

07.00

+0.9%(+1.4%)

-1.5%(+1.7%)

-

 

UK

International Trade Balance (Jun)

07.00

-£9.7bn

-

-

 

Twn

GDP (Q2, Prov.)

09.00

(+3.1%)

(+3.1%)

-

 

EZ

Industrial Production (Jun.)

10.00

+0.8%(+1.6%)

+0.1%(+1.0%)

+0.3%(+0.9%)

*m/m(y/y) unless otherwise stated; p = provisional

FX Metrics Summary Table

G10

3M Carry1

6-Week Change2 (%)

1-Year Change2 (%)

Implied Volatility3

Risk Reversal4

  

Value

Percentile5

Value

Percentile5

Value

Percentile6

Value

Percentile6

DXY

-

2.1

78

15.6

96

-

-

-

-

EUR

0.08

-3.4

14

-14.1

5

9.6

67

-2.2

15

JPY

-0.39

1.0

66

-18.9

3

10.6

73

0.6

24

GBP

1.87

-1.8

28

-13.5

8

9.9

71

-2.4

13

CHF

-0.21

0.4

52

-5.7

11

8.4

57

0.1

30

CAD

2.81

-0.1

48

-3.3

30

7.4

54

-1.3

5

AUD

2.15

-1.0

38

-6.8

26

11.6

71

-2.5

11

NZD

2.92

-1.3

35

-11.5

12

11.0

58

-2.5

8

SEK

1.14

-0.9

42

-15.5

10

12.1

78

-1.6

5

NOK

1.90

0.4

55

-10.1

15

13.6

84

-2.0

7

EM Asia

CNY

1.59

-1.1

25

-4.4

26

4.2

69

-0.5

23

KRW

2.05

-0.6

39

-12.1

9

9.5

63

-0.1

86

TWD

0.90

-0.8

27

-7.4

5

6.0

76

-1.2

8

INR

6.23

-1.6

24

-6.7

25

5.6

25

-0.6

72

MYR

2.90

-1.3

21

-5.4

18

6.4

41

-0.5

58

IDR

4.44

-0.5

45

-3.7

40

7.8

48

-1.0

60

THB

0.04

-1.1

29

-6.9

14

7.7

98

0.0

45

SGD

2.49

0.3

51

-2.2

25

5.3

57

-0.3

64

PHP

5.11

-2.1

17

-9.2

7

-

-

-0.7

36

EMEA

ZAR

6.28

-5.3

18

-13.8

26

15.5

59

-1.8

90

TRY

48.64

-3.5

32

-52.5

3

28.7

95

-11.1

2

RUB

36.44

-15.1

2

20.7

98

44.0

96

-11.3

5

ILS

0.42

3.2

90

-3.9

24

8.1

82

-0.6

41

PLN

7.93

-4.9

11

-17.0

7

14.2

79

-2.2

22

CZK

7.12

-2.9

21

-11.1

10

11.2

95

-2.8

1

HUF

10.88

-3.3

22

-22.9

2

18.1

99

-3.3

3

RON

7.79

-3.0

22

-14.2

15

-

-

-

-

LatAm

BRL

13.25

-1.9

37

0.5

56

21.3

97

-0.9

96

MXN

9.59

-1.5

31

-2.5

47

11.8

50

-2.2

42

COP

9.22

-7.5

6

-9.7

26

16.8

92

-1.1

36

CLP

10.13

-4.3

14

-14.7

13

19.9

99

-2.3

19

PEN

7.10

-4.4

2

4.6

81

-

-

-

-

Sources: Refinitiv, Bloomberg, CE, as of ~15.30 BST 5th August 2022; bolded values indicate the top and bottom quintiles of a historical distribution. 1. Implied yield of 3M forwards vs US$; 2. %-changes vs USD, aimed to gauge momentum (6 week) and mean-reversion (1 year); 3. 3M at-the-money option-implied volatility (annualised); 4. Difference between implied volatility of 3M 25-delta put and call options; 5. Since 2000, with the exception of CNY, which is since 2015; 6. Since 2010, with the exception of CNY (since 2015).

Quarterly Forecast Table

G10

Current*

Q3 2022

Q4 2022

Q1 2023

Key Crosses

Current*

Q3 2022

Q4 2022

Q1 2023

EUR/USD

1.02

1.01

1.00

1.02

DXY

106.58

107.13

108.03

106.22

USD/JPY

135

133

130

129

EUR/JPY

138

135

130

132

GBP/USD

1.21

1.20

1.18

1.20

EUR/GBP

0.84

0.85

0.85

0.86

USD/CHF

0.96

0.96

0.95

0.94

EUR/CHF

0.98

0.97

0.95

0.96

USD/CAD

1.29

1.31

1.35

1.36

EUR/SEK

10.4

10.5

10.8

10.7

AUD/USD

0.69

0.68

0.66

0.66

EUR/NOK

10.0

10.1

10.3

10.3

NZD/USD

0.62

0.62

0.60

0.60

NOK/SEK

1.04

1.04

1.05

1.04

USD/SEK

10.18

10.40

10.75

10.45

AUD/NZD

1.11

1.10

1.10

1.10

USD/NOK

9.79

9.97

10.25

10.02

AUD/JPY

93.4

90.5

85.8

84.4

EM Asia

USD/CNY

6.76

6.85

7.00

7.00

EUR/CNY

6.88

6.93

7.00

7.17

USD/KRW

1300

1319

1350

1338

CNY/JPY

20.00

19.46

18.57

18.40

USD/TWD

30.0

30.4

31.0

30.6

EUR/KRW

1323

1333

1350

1370

USD/INR

79.4

79.6

80.0

79.5

JPY/KRW

9.62

9.91

10.38

10.39

USD/MYR

4.45

4.47

4.50

4.45

CNY/KRW

192

193

193

191

USD/IDR

14890

15121

15500

15623

 

 

 

 

 

USD/THB

35.7

35.8

36.0

35.5

 

 

 

 

 

USD/SGD

1.38

1.37

1.34

1.34

 

 

 

 

 

USD/PHP

55.4

56.4

58.0

58.5

 

 

 

 

 

EMEA

USD/ZAR

16.79

16.87

17.00

17.12

EUR/ZAR

17.09

17.05

17.00

17.55

USD/TRY

17.96

20.25

24.00

24.00

EUR/TRY

18.28

20.44

24.00

24.59

USD/RUB

60.5

60.3

60.0

61.2

EUR/RUB

61.6

61.0

60.0

62.8

USD/ILS

3.34

3.40

3.50

3.45

EUR/ILS

3.40

3.44

3.50

3.53

USD/PLN

4.62

4.69

4.80

4.65

EUR/PLN

4.71

4.74

4.80

4.75

USD/CZK

24.1

24.6

25.5

24.8

EUR/CZK

24.5

24.9

25.5

25.4

USD/HUF

387

392

400

389

EUR/HUF

394

396

400

398

USD/RON

4.84

4.94

5.10

5.00

EUR/RON

4.92

4.99

5.10

5.11

LatAm

USD/BRL

5.23

5.33

5.50

5.56

 

 

 

 

 

USD/MXN

20.4

20.8

21.5

21.3

 

 

 

 

 

USD/COP

4337

4342

4350

4362

 

 

 

 

 

USD/CLP

911

926

950

938

 

 

 

 

 

USD/PEN

3.88

3.89

3.90

3.88

     

Sources: Refinitiv, CE, *as of ~15.30 BST 5th August 2022.

Key Forecast Table

DM

2022

2023

2024

EM

2022

2023

2024

DXY

108.03

100.69

96.71

USD/CNY

7.00

7.00

7.00

EUR/USD

1.00

1.10

1.15

USD/INR

80.00

78.00

78.00

USD/JPY

130.0

125.0

120.0

USD/BRL

5.50

5.75

5.75

GBP/USD

1.18

1.25

1.30

USD/MXN

21.50

20.50

20.00

USD/CAD

1.35

1.40

1.40

USD/ZAR

17.00

17.50

17.50

AUD/USD

0.66

0.64

0.64

 

 

 

 

Sources: Refinitiv, CE; all values are year-end forecasts.

Jonathan Petersen, Senior Markets Economist, jonathan.petersen@capitaleconomics.com

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FX Markets Weekly Wrap

The rally in the US dollar pauses ahead of the Fed

After a series of strong weeks left it at two-decade highs, the US dollar seems set to end this week lower against most major currencies. Despite weaker-than-expected activity data out of the US, UK, and euro-zone this week, cyclically sensitive (i.e., “high-beta”) developed market currencies strengthened the most against the dollar. This coincided with a rally in “risky” assets and a fall in government bond yields; this appears to reflect a view that weakening economic activity will reduce the need for additional monetary tightening. But we doubt slowing economic growth in the US and other major economies – or recessions in the cases of the UK and euro-zone – will bring inflation down to target in the absence of more interest rate hikes by central banks. Indeed, we expect the Fed to deliver another 75bp hike next week and raise rates into 2023. Amid a backdrop of a hawkish Fed and slowing global growth, we think the dollar will resume its broad-based strength before long. Australia Drop-In (15:00 SGT, 27th July): Join our 20-minute briefing on why we think Australian inflation is heading higher than the consensus expects, how the RBA will have to raise rates by more than most appreciate to tame it, and what it all means for Aussie asset prices. Register now

22 July 2022

FX Markets Update

We expect “high-beta” DM currencies to fall further

Despite their recent rebound, we still think that “high-beta” developed market currencies will weaken further against the US dollar for the remainder of the year.

22 July 2022
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