EC September Market Commentary

(August 31 indicative closing prices, previous in parentheses)

Spot: $1.1810 ($1.1870)

Median Bloomberg One-month Forecast $1.1810 ($1.1885) 

One-month forward $1.1820 ($1.1880) One-month implied vol 5.4% (5.3%)

Japanese Yen: The dollar-yen exchange range often seems to be range-bound, which has clearly been the case for the three months through August. With a couple of exceptions, the greenback has been between JPY109 and JPY111. It ended the month in the middle of the range. A spike lower would likely be associated with a risk-off event. A break higher would likely coincide with a rise in US yields. The expanded and extended formal emergency, which is voluntary, covering more than 70% of the population through nearly the middle of September, pushes the recovery into Q4. The Bank of Japan could downgrade its economic assessment when it meets on September 22. While the Liberal Democratic Party may find an alternative leader to Prime Minister Suga, but an alternative to the broad thrust of policy is a different story. Meanwhile, the way that Beijing has clamped down on Hong Kong and its harassment of Taiwan have pushed Japan's political elite to boost its commitment to defend Taipai. Some retaliatory action by Beijing should not be surprising.

Spot: JPY110.00 (JPY109.85)

Median Bloomberg One-month Forecast JPY110.00 (JPY109.85)

One-month forward JPY109.95 (JPY109.80) One-month implied vol 5.2% (5.4%)

British Pound: Sterling was turned back after approaching $1.40 at the end of July and trended lower to reach almost $1.36 on August 20. It held above the July spike low near $1.3570 and recovered to test the middle of the range, where the 200-day moving average is also found at the end of August. The UK economy returned to growth in Q2 after contracting in Q1. Still, despite the high vaccination rate and supply chain disruptions that have hit the auto sector hard, the Delta variant is stifling growth. The PMI slowed in July and August. There are three potentially important dates for sterling in September. On the 17th, August retail sales will be reported. It will frame the shocking 2.5% drop in July retail sales (+0.2% expected). On September 23, the Bank of England meets. There was one dissent in August to slow the Gilt purchases. It may have been difficult to share a sense of urgency when the year-over-year measure of CPI that includes owner-occupied costs moderated to 2.1% from 2.4% in July. At the end of the month, the furlough program that subsidizes wages will be terminated. Initially, the government covered 80% of wages (up to GBP2.5k a month). The government's share has subsequently fallen to 60%, with employers required to pay 20% (up from 10%). It had been extended four times. A little less than 2 mln people participated in the program at the end of July (down from a peak of 5.3 mln in January) or about 6% of the workforce.

Spot: $1.3755 ($1.3905)

Median Bloomberg One-month Forecast $1.3790 ($1.3930) 

One-month forward $1.3760 ($1.3910) One-month implied vol 6.2% (6.6%)

Canadian Dollar: The Canadian dollar was the weakest of the major currencies in August, falling by about 1.2%. It was the third consecutive monthly decline, but, year-to-date, it remains the strongest currency in the G10. Indeed, the Canadian dollar and sterling are the only major currencies to have posted gains, albeit minor, against the dollar through the first eight months (~0.75% and 0.55%, respectively). The Canadian dollar has been moving more in line with oil prices. The correlation of the change in the Canadian dollar and the change in the price of WTI has increased to over 0.85, the highest since March 2020, which itself was the extreme since 2012. The OECD's purchasing power parity model put the fair value at CAD1.21 (~$0.8265). The market continues to price in a hike in the middle of the next year, three-six months ahead of the Federal Reserve. The Bank of Canada meets on September 8 and is likely to confirm its projection that the output gap will close around mid-2022. Activity softened in the spring, and Q2 GDP unexpectedly contracted. Nevertheless, the economy appears to have ended the first half with strong momentum that is carrying into Q3. Fiscal policy may be somewhat more accommodative than if the election had not been called, even if Trudeau's Liberals do not secure a parliamentary majority.

Spot: CAD1.2610 (CAD 1.2475) 

Median Bloomberg One-month Forecast CAD1.2560 (CAD1.2435)

One-month forward CAD1.2615 (CAD1.2480) One-month implied vol 7.3% (6.8%) 

Australian Dollar: The lockdowns to combat the virus are taking an economic toll. Although the central bank wants to push ahead with its tapering efforts, the market continued to sell the Australian dollar. August was the third consecutive monthly decline for the Aussie. The pace of decline has slowed from 3% in June and 2% in July to about 0.45% in August 2.5% rally in the last full week of the month. It is off almost 5% for the year, the worst-performing major currency after the Japanese yen (-6.2%). Australia's two-year note discount to the US approach 22 bp in late August (-25 bp), the most since March 2020. The carry works against the Australian dollar. The shuttering of a couple important Chinese ports and the nearly 33% drop in iron ore prices since mid-July may impact Australia's external balance. The next important technical support area is $0.7000-$0.7050. With a nationwide lockdown, the Reserve Bank of New Zealand held off hiking rates in August but signaled that it still intended to normalize policy. It meets next on October 5. The monetary policy divergence between Australia and New Zealand has been another source of pressure on the Australian dollar, which fell to new lows since the pandemic first struck.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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