News, insights and analysis from the global FX markets

This is your monthly FX market round-up with the latest news, insights and analysis.

GBP

September saw GBP continue its sell off as it’d done in August. Despite staying in the 1.25 to 1.26 region for the final few days of August, nothing could stop the rot as the pound lost nearly 5% of its value against the dollar throughout the month.

Stronger than expected employment data from the US saw the dollar gain momentum, with an anticipated interest rate hike in the UK becoming more likely. Together, this meant the pound had little chance of staying in the high 1.20’s and it lost ground for 14 working days in total. Over the last few months, the Bank of England continued to raise interest rates to combat increased inflation and with the headline reading falling, the market raised more questions on how the bank would react. The last meeting on 21st August 2023 saw the announcement that the base rate would remain at 5.25% resulting in the pound falling on the open market.

The next meeting is at the start of November, giving the pound little in the way of direction until then but traders will continue to monitor data releases to guess the next move for interest rates. One of the key takeaways from the last meeting was that, if needed, the door is still ajar for another hike before the year is out.

USD

Another strong month for the dollar, with DXY appreciating 2.5%+ in the month.

Despite not going up in September, the updated Fed Dot Plot brought two pieces of good news for the USD.

It is likely that there will be another increase in November before the Fed finally puts an end to this year long hiking cycle.
Compared to the June Dot Plot, the average forecast for 2024 exchange rates is now significantly higher meaning it’s possible that the Fed will only lower rates by 0.5% for the whole of 2024.

The Fed’s relative hawkish stance is backed by the strong jobs market and resilient economic growth, which clearly stands out compared to the British and European economies. Additionally, it seems the Green Back may be the last to finish this hiking cycle amongst all developed economies; this will likely continue to provide support for the USD in the coming months.

EUR

The Euro, trading at its lowest levels this year against the USD (below $1.05), faces headwinds. The ECB’s September rate hike surprised the financial markets and further weakened the Euro. The strong U.S. dollar, driven by a resilient U.S. economy and attractive U.S. Treasury yields, is a key factor in the Euro’s recent weakness. Rising oil prices, up nearly 30% in the last quarter due to production cutbacks, are also impacting the euro area which is heavily reliant on oil imports.

The ECB’s tightening cycle, which has seen 450 basis points in rate hikes since July 2022, aims to combat high inflation. However, uncertainties persist in the monetary policy transmission because of the unique nature of the current cycle and past economic shocks. Also, geopolitical factors and Italy’s fiscal situation pose additional risks for the Euro area.

A weaker Euro can benefit exporters but increases import costs and, when combined with rising oil prices, can lead to inflationary pressures. The ECB is monitoring these factors but its control is limited.

The market will be closely watching two data releases this month. On 18th October 2023, there will be Eurozone inflation data for September, providing valuable insights into inflationary pressures affecting the euro. Additionally, on 26th October 2023, the market will be attentive to the European Central Bank’s monetary policy statement and President Lagarde’s press conference.

AUD

In September, the Australian Dollar (AUD) depreciated the most against the US and the New Zealand Dollar but it gained more than 2.5% against the British Pound. Negative risk sentiment, concerns about the Chinese economy and lower commodity prices drove the Australian Dollar to 10-month lows of 0.6330 against the Dollar.

The Reserve Bank of Australia (RBA) decided to maintain its official cash rate at 4.10% as widely expected. It’s worth noting that the RBA has now kept rates unchanged in the past three monetary policy meetings and the RBA policymakers have kept doors open for further policy tightening, warning that inflation is still too high and will remain so for some time.

Additionally, local employment data came in above expectations with 64.9k jobs added to the economy – higher than expectations of 23k. Additionally, the Unemployment Rate landed at 3.7%, which was in line with expectations and July’s reading.

The August Monthly inflation figure rebounded to 5.2% from July’s 4.9% and an expected rise in inflation has spurred expectations of another interest rate hike to come by 25 bps either in the November or December meetings.

NZD

The New Zealand Dollar (NZD) was the best-performing currency among the G10 with the NZD-GBP pair being the biggest gainer as it rose 3.90% in September. However, NZD-USD was down 0.45%.

New Zealand’s upbeat domestic data has increased market speculations that the Reserve Bank of New Zealand (RBNZ) will keep interest rates on hold in the October monetary policy meeting but anticipated that the central bank would hike in November by another 25 bps.

The New Zealand economy expanded by 0.9% during the second quarter, beating estimates of 0.5% extension. Meanwhile, New Zealand’s ANZ Business Confidence for September improved to 1.5 from a -3.7 drop in the previous month.

CNH

USD-CNH reached a new high of 7.3680 on 8th September 2023, which is the highest level achieved since the inception of the offshore RMB market. Certain analysts with a CNH bearish view have even suggested 7.40 as the next level to watch.

In response to the drastic CNH depreciation, the PBOC quickly intervened the following Monday with a strong statement and a number of policy tools.

The most effective policy tool so far has been withdrawing CNH liquidity from Hong Kong, causing CNH borrowing cost to increase significantly – the one-week HIBOR fixing is now around 5%. The higher yield on CNH makes CNH bearish bets significantly less attractive return-wise, which is driving away speculators.

Since then the exchange rate has stabilised around the 7.30 mark.

JPY

The Bank of Japan (BOJ) surprised the market with an unexpected bond buying operation signalling its determination to curb rising yields. This move comes as Japanese Government Bonds (JGBs) face their most significant quarterly sell off in over 20 years. Adding to the tension, a former BOJ official anticipates benchmark yields could climb even higher, possibly reaching 2%.

There is also growing speculation that the BOJ may need to allow interest rates to increase in order to narrow the yield gap with the United States. This yield differential has been a driver of yen depreciation and is causing negative economic consequences.

The JPY fell sharply against the USD following the unscheduled buying.

SGD

In August, Singapore’s consumer price index (CPI) inflation showed a slight easing, mainly due to a small price increase in services and food even though higher fuel prices continued to support inflation. As expected, the CPI increased by 4% over the 12 months leading to August 2023 compared to a 4.1% increase in the previous month.

MAS anticipates that core inflation will continue to ease in the coming months, thanks to ongoing reductions in import prices and a less restricted labour market in the country. Although Singapore’s economy avoided a recession in the second quarter, the MAS has downgraded its economic growth outlook for 2023. Despite elevated inflation, the central bank is expected to keep its monetary policy unchanged in the upcoming review in October as economic growth in Singapore remains weak and the gradual easing of inflation provides some flexibility for policy stability.

Disclaimer: This newsletter is to provide insight on the market and is not be to replied upon to be financial advice

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