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Market News Foreign Exchange Weekly Review: The risk aversion and cooling offset the Fed's resolution efforts, the US dollar rushed higher and fell, and the yen fell to a ten-week low

Foreign Exchange Weekly Review: The risk aversion and cooling offset the Fed's resolution efforts, the US dollar rushed higher and fell, and the yen fell to a ten-week low

In the past week, the foreign exchange market was mainly affected by the Fed’s interest rate decision and changes in risk aversion. The market originally held hawkish expectations for the Fed’s interest rate decision, and the Fed is indeed hawkish. In addition, the market’s concerns about the Asian real estate market have increased. , The U.S. dollar index once hit a new high of 93.52 in the past month, but after the worries cooled down, the U.S. dollar index basically gave up all the gains. In terms of non-US currencies, the euro, Australian dollar, and New Zealand dollar all bottomed out and rebounded, with a relatively small weekly decline; the safe-haven yen was abandoned by the market.

Eden
2021-09-25
10383

In the past week, the foreign exchange market was mainly affected by the Fed’s interest rate decision and changes in risk aversion. The market originally held hawkish expectations for the Fed’s interest rate decision, and the Fed is indeed hawkish. In addition, the market’s concerns about the Asian real estate market have increased. , The U.S. dollar index once hit a new high of 93.52 in the past month, but after the worries cooled down, the U.S. dollar index basically gave up all the gains and closed at around 93.27, basically flat on the weekly line, with an increase of about 0.05%.

In terms of non-US currencies, the euro, Australian dollar, and New Zealand dollar all bottomed out, and the weekly decline was relatively small; the safe-haven yen suffered market abandonment, and the dollar rose to a high of nearly two and a half months against the yen, closing at 110.72, a weekly increase of about 0.72. %, the biggest weekly increase since the end of May. The pound's performance was also relatively weak, with a shock drop of 0.45% this week, which was the third consecutive week of decline, and closed at around 1.3679.



The Fed said it would begin to reduce debt purchases in November at the earliest, and the U.S. dollar once hit a one-month high


The Federal Reserve on Wednesday (September 22) maintained the target interest rate target range at the current 0%-0.25% unchanged. The Fed stated that it may start reducing its monthly bond purchases as early as November, and hinted that as the Fed accelerates the reversal of its crisis policy during the pandemic, the interest rate hike after the end of bond purchases may be earlier than expected.

The Fed’s latest policy statement and separately released economic forecasts reflect this slight hawkish tendency. The statement and forecast show that nine out of 18 policymakers expect to raise interest rates in 2022 to deal with inflation. The Fed expects the inflation rate to reach 4.2% this year, more than twice the inflation target.

Powell said that as long as U.S. employment growth is “reasonably strong” by September, the Fed can begin to reduce the size of its monthly debt purchases by US$120 billion after the November 2-3 policy meeting. The United States will announce the September employment report in early October, which is the last employment report before the November meeting. "There is no need for an amazing or super strong employment report" to prompt the Fed to start "scaling" its debt purchase program, which is expected to end in the middle of next year.

Steven Violin, portfolio manager of FLPutnam Investment Management Company, said, “From now on, it is very likely that debt purchases will be gradually reduced from November, but this is uncertain. If various risks arise, this still has to meet many thresholds. Conditions and risks include the federal debt ceiling debate, the outlook for the new crown epidemic, or interference in the Asian real estate market,"

The U.S. dollar index fluctuated higher after the Fed's interest rate decision, reaching a maximum of 93.52, a new high since August 23. However, on Thursday (September 23), the U.S. dollar index weakened sharply and gave up all the gains. On the one hand, it was because of the "boots landing"; on the other hand, the market's worries about the Asian real estate market cooled down, which weakened the U.S. dollar. Demand for hedging.



US economic data this week was worse than expected, dampening the confidence of dollar bulls


In addition, the US economic data released this week was not satisfactory, which also undermined the confidence of the US dollar. Among them, the US August sales of existing homes fell slightly more than expected, and housing prices slowed down; in September, Markit's comprehensive PMI fell to the lowest in a year, and the service industry PMI was the lowest in 14 months; last week, the number of initial jobless claims in the US unexpectedly increased.

Data show that the sales of existing homes in the United States in August fell slightly more than expected because supply is still tight, but there are signs that demand driven by the sharp rise in housing prices and the new crown pandemic may have peaked. Existing home sales fell 2.0% in August, and the annual rate was 5.88 million after seasonal adjustments. Sales in all four major regions declined, with the densely populated southern region falling by 3.0%. Analysts interviewed by Reuters previously predicted that existing home sales in August are expected to fall to 5.89 million

The expansion of business activities in the United States in September was the slowest in a year, due to severe supply constraints and peak demand, in line with expectations of a sharp slowdown in economic growth in the third quarter. Data firm IHS Markit said on Thursday that its U.S. Comprehensive Purchasing Managers Index (PMI), which tracks manufacturing and services, fell to 54.5 in early September, the lowest since September 2020, and the final value in August was 55.4. The index above 50 indicates that the private sector is expanding.

The initial value of the service industry PMI fell to 54.4 in September, the lowest in 14 months, and the final value in August was 55.1. Economists had previously forecast a value of 55 in early September. The service industry accounts for more than two-thirds of US economic activity.

The initial value of the manufacturing PMI unexpectedly dropped to 60.5 in September, and the final value in August was 61.1. Economists had previously predicted that the value for the beginning of September was 61.5. Manufacturing accounts for 11.9% of the total economy.

The number of initial jobless claims in the United States unexpectedly increased by 16,000 to 351,000 after seasonal adjustments last week, driven by the surge in the number of applicants in California and Virginia. The number of initial jobless claims increased for the second consecutive week, which puzzled economists. Some people attribute this to California's wildfires, while others believe that it was Hurricane Ida, which severely damaged US offshore energy production in late August.

An employment tracking model created by JPMorgan's flux research team predicts that US employment data in September will remain weak, as consumers seem to have cut their travel and leisure spending since Labor Day. The model, combined with a series of alternative data such as the use of Chase credit cards and the number of airport security checks, predicts that the number of jobs in September will increase by 333,000. In predicting a sharp slowdown in U.S. job growth last month, JPMorgan Chase’s model is more accurate than almost all other forecasts.

The European Central Bank is ready to meet persistently high inflation, or end PEPP in March next year


The euro to dollar rebounded this week, hitting a one-month low near 1.1687, but the hawkish comments of the European Central Bank supported the euro. The euro closed at 1.1720, a weekly decline of only 0.04%; the market will pay more attention to ECB officials next week. More statements and the performance of September CPI data.

Sources who participated in the discussion this week said that European Central Bank policymakers are preparing for inflation to exceed the central bank’s raised forecast, paving the way for the end of emergency bond purchases in March. The European Central Bank plans to make a decision on the future of the Pandemic Emergency Asset Purchase Program (PEPP) in December. It is expected that as the economy returns to the pre-pandemic track, inflation will fall back in 2022-23 after an abnormal jump this year.

Standard & Poor's Global Ratings said that it has raised its economic growth and inflation forecasts for the euro area this year, but it is expected that next year's inflation rate will fall below the 2% target. The rating agency said that since the lifting of blockade restrictions in March-April, Europe’s economic recovery has been “unexpectedly strong”, which prompted it to raise its forecast for this year’s economic growth rate to 5.1% from the previous 4.4%.

(Daily chart of the euro against the dollar)

The Bank of Japan maintains its monetary policy unchanged, and the yen plummets as a hedge against risk


The Bank of Japan kept its monetary policy unchanged on Wednesday, but its outlook on exports and output was even more bleak, which strengthened expectations that the bank will maintain its large-scale stimulus measures, even if other major central banks are considering withdrawing support measures from the crisis model. .

Affected by the shutdown of Asian factories caused by the new crown epidemic, the haze over manufacturers has made Japan's fragile economic recovery even worse, after weak consumption has hindered economic development.

The Bank of Japan stated in its policy decision statement that “exports and factory output continue to increase, but to a certain extent, they are affected by supply constraints,” and acknowledged that the shutdown of Asian factories caused by the epidemic has had an impact on Japanese manufacturing.

The Bank of Japan maintained its assessment of the economy unchanged, saying that the economy "has a rebound trend, but the economic situation remains severe due to the impact of the epidemic." As generally expected, the Bank of Japan maintained short-term interest rates at minus 0.1%, and the 10-year bond yield target remained unchanged at near zero.

The impact of the Bank of Japan’s interest rate decision against the yen is relatively limited. This week’s trend of the yen is dominated by changes in the dollar’s trend and market risk aversion. When the dollar is rising and the risk aversion is cooling down, the U.S. dollar to yen hit a maximum of 110.79. The second highest position since July 7, and the resistance at the high point of August 11 at 110.80.

After this policy meeting, Japan’s ruling party will hold a leader election on September 29, which may shift the government’s focus from its current position based on former Prime Minister Shinzo Abe’s “Abenomics” re-inflation policy.

Taro Kono, a popular candidate for the chairman of the Japanese ruling Liberal Democratic Party, said that the Japanese government and the central bank must work closely together to avoid the devaluation of the yen. "If the market loses trust in Japan's finances, it may cause the yen to fall," Kono said. "If the yen continues to fall, import costs will rise and cause inflation." He also said that Japan must accelerate the pace of deregulation. To attract foreign investment and promote start-ups.

(Daily chart of USD/JPY)

The Bank of England said that the rationale for raising interest rates has been strengthened, and the two committee members called for an early end to bond purchases


The pound has performed poorly this week. On the one hand, the U.S. dollar is relatively strong, and on the other hand, the PMI data is weak. However, the Bank of England's interest rate decision is slightly hawkish, providing support for the pound.

A survey showed that the British economy lost more momentum this month, and companies once again struggled to cope with rising costs, highlighting the difficult situation faced by Bank of England officials before the interest rate decision on Thursday.

The initial value of the IHS Markit/CIPS UK Comprehensive Purchasing Managers Index (PMI) in September fell for the fourth consecutive month, falling from 54.8 in August to 54.1, the lowest since February. The estimate given by economists is 54.5.

The survey shows that both the service industry and the manufacturing industry are slowing down. The service industry PMI fell to 54.6 in September from 55.0 in August, the lowest since February. Business expectations for service companies have fallen to a nine-month low. Manufacturing PMI fell to 56.3 in September from 60.3 in August, which is also the lowest since February

Chris Williamson, chief business economist at IHS Markit, who compiled the PMI data, said, “September PMI data will add to people’s concerns that the UK economy is heading for a wave of'stagflation', although there are clear signs that demand has peaked since the second quarter. It is cooling down afterwards, but the survey also shows that corporate activities are increasingly restricted by shortages of raw materials and labor. This is most obvious in the manufacturing industry, but it is also true in some service companies."

However, the Bank of England still stated on Thursday that the rationale for raising interest rates "seems to be strengthened". The bank now expects that inflation in the UK will reach over 4% by the end of the year, more than twice the target level.

The Bank of England on Thursday kept its target interest rate unchanged at 0.1% and maintained its asset purchase target of 895 billion pounds ($1.22 trillion) unchanged. The Bank of England said that it expects inflation to rise through the target will be temporary, and the debt purchase action plan will continue until the end of the year. But the two policymakers called on the central bank to immediately stop the 895 billion pounds ($1.23 trillion) bond purchase program.

The Bank of England said that the sharp rise in natural gas prices in recent weeks has led to the closure of several smaller UK energy suppliers and forced the government to intervene, which means that inflation may also remain above 4% in the first half of 2022.

The pound fell to 1.3610 against the US dollar this Monday, a new low since August 20, but rose 0.7% on Thursday, recovering part of the decline, and finally closed at 1.3679, a weekly drop of about 0.45%.

(The British pound against the U.S. dollar daily chart)

Deutsche Commerzbank analyst Esther Reichelt pointed out, “The financial market now includes the possibility of the UK’s first interest rate hike in the first quarter, which may temporarily support the pound, but the UK’s economic recovery has raised the issue of early interest rate hikes. To be clear: We It is reasonable to believe that the current strength of the pound sterling is reasonable, but the continuing challenges facing economic growth, such as the labor shortage caused by Brexit, may prevent the rapid tightening of monetary policy."

Prospects


In the next week, there are relatively many economic data and risk events, which can be described as a super week. Investors must wear their "safety belts" in advance. In terms of data, there will be orders for durable goods in the United States in August and the economy in September in the Eurozone. Index, China September PMI, Eurozone September CPI data, US August PCE price index and US September ISM manufacturing PMI and other heavy economic data; events will usher in the follow-up impact of the German general election, the Japanese general election, and the chairman of the Federal Reserve Speeches by many Fed officials including Powell, speeches by European Central Bank President Lagarde and other European Central Bank officials, speeches by Bank of England Pele, and speeches by U.S. Treasury Secretary Yellen.

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