Foreign Exchange Weekly Review: European currencies wiped out the gains during the year, and supply chain bottlenecks caused big trouble

The world’s major central bank governors warned this week that supply constraints that hinder global economic growth may still worsen, keeping inflation high for a longer period of time, even if the current price surge may still be temporary. Traders are paying close attention to clues about when governments and central banks around the world will reverse the large-scale emergency support measures launched last year to fight the epidemic.

This week, the U.S. dollar index recorded the largest increase of 0.85% in the past six weeks, reaching its highest level since September 28, 2020 to 94.504. The impact of the epidemic on the global economy has disrupted supply chains on all continents, leading to a series of shortages of goods and services around the world. The U.S. dollar is regarded as a safe-haven asset when the market is under pressure. Affected by this, non-US currencies closed sharply lower.

The euro closed down more than 1% against the U.S. dollar, a record low in more than 14 months. European Central Bank President Lagarde expressed concern about the shortage of goods and services; the British pound closed down nearly 1% against the U.S. At a new nine-month low, energy shortages have raised the prospect that the UK economy may face a cold winter.

Lagarde worried about supply chain bottlenecks

The euro against the U.S. dollar hit the biggest drop of 1.08% since the week of June 18, refreshing the intraday low since July 23, 2020 to 1.1561. The impact of the epidemic on the global economy has disrupted supply chains on all continents, leading to shortages of a series of goods and services around the world. European Central Bank President Lagarde expressed concern about this.


She said that economists thought that these bottlenecks would disappear in a few weeks, but it is still uncertain. "We have experienced supply bottlenecks and supply chain disruptions for several months... This situation seems to be continuing. These areas are still accelerating. I am thinking of shipping, cargo handling and other areas."

Germany’s import prices last month recorded the largest increase in 40 years, driven by the jump in oil and natural gas prices, and the bottleneck of the raw material supply chain has worsened, which indicates that consumer prices will rise further.

European Central Bank decision-maker Karimir told Bloomberg News on Tuesday that the European Central Bank will not automatically expand its asset purchase plan after the end of the 1.85 trillion euro pandemic emergency stimulus plan. “Worries about the cliff effect will not automatically equate to increasing routine The requirements of the project. There is no automatic formula. We will make a decision based on the conditions at a specific time."

The European Central Bank's "Pandemic Emergency Asset Purchase Program" (PEPP) is expected to end in March next year, and investors expect the European Central Bank to increase other stimulus measures to fill the gap.

Centeno, governor of the Bank of Portugal and member of the European Central Bank Management Committee, said that the uncertainty of rising inflation rates is lingering and requires close monitoring by the European Central Bank. The European Central Bank believes that rising inflation is a temporary trend, but must be prepared to adopt flexible measures. action.

He said at an online conference in Lisbon: "Regarding monetary policy, the best answer to uncertainty is to maintain close monitoring, be steady and steady, and be ready to take flexible actions at any time. The European Central Bank has the tools to respond flexibly and effectively. "

He said that the Eurozone economy is expected to continue to grow rapidly, exceeding the pre-crisis level in the fourth quarter. Although the inflation rate continues to be higher than forecast, "this surge is still considered temporary."

Kit Juckes, strategist at Societe Generale said: “As long as the market still believes that the US will begin to tighten monetary policy within a reasonable time frame, the U.S. dollar should remain well supported. While the Fed raises interest rates, the European Central Bank may maintain the prospect of negative interest rates. Keep the euro against the dollar in the post-2014 range, with the center of gravity around 1.12-1.16."

Britain's energy shortages, the economy may face a cold winter

The British pound closed down 0.92% against the U.S. dollar, falling for the fourth consecutive week, and hit a new low of 1.3411 since December 23, 2020. Concerns about the UK facing a severe economic winter exacerbated the pound's decline. Investors' worries about the sharp rise in the price of natural gas in the UK and the shortage of gasoline in the past week have overshadowed the remarks that the Bank of England may raise interest rates.


The Bank of England maintains a hawkish tone despite the growing supply chain problems. But what complicates the outlook for the Bank of England’s forecast is that inflation is also soaring, driven by widespread supply chain disruptions, including the panic buying of gasoline last week.

The Governor of the Bank of England Bailey said that he will keep a very close watch on inflation expectations. “Monetary policy cannot solve supply-side shocks. Monetary policy cannot produce computer chips, wind energy, or truck drivers.”

As many as 90% of gas stations in major cities in the UK had no gas to fill on Monday, as panic buying deepened the supply chain crisis caused by a shortage of truck drivers. Retailers warned that this could hit Britain, the world's fifth largest economy.

Due to the shortage of tank truck drivers, gas stations in major cities in the UK are gradually drying up. At the same time, people are also worried that once the vacation plan introduced to reduce the impact of the epidemic ends, it may have an impact on the unemployment rate.

A key indicator that the Bank of England is watching closely to measure the financial market’s expectations for British inflation in the next few years rose to its highest level in at least eight years on Tuesday, due to the sharp rise in British bond yields. This reflects investors' growing conviction that the rise in British inflation will not be as temporary as the Bank of England hopes, and the recent supply chain problems have escalated into a full-blown crisis in the past week.

Neil Jones, head of foreign exchange sales at the financial institution of Mizuho Bank, said: "The pound is still suffering from domestic shortages, rising inflation and the outlook for a harsh winter, all of which have put pressure on previous optimistic expectations for the pound."

Kenneth Broux, a strategist at Societe Generale, said: “Pele warned more than once that the Bank of England might raise interest rates before the end of quantitative easing, which made the market notice that they are taking this issue seriously. We will see more people. Annoying inflation figures, which will enable meaningful discussions at the MPC (Monetary Policy Committee) meetings in November and December."

This seems inconsistent with some speculation that the Bank of England may raise interest rates as early as November. Bailey previously stated that he and other members of the Monetary Policy Committee believe that there are more and more reasons for raising interest rates, which echoes the statement made by the central bank after the policy decision last week.

Rabobank exchange rate strategist Jane Foley said: "Last week, the initial hawkish news was downplayed after the weekend, and the market realized that households were already facing the unfavorable situation of rising national insurance payroll tax rates and rising energy prices."

In view of other challenges facing the UK economy, an analyst at UniCredit in Italy said in the report: “We expect the pound to rise due to the prospect of rising domestic interest rates, but this is unlikely to happen easily in the short term.”

Yen narrows decline

USD/JPY hit a new high of 112.075 since February 21, 2020, but it gave up more than half of its gains in the final trade, closing up 0.28% at 111.047. Japan has lifted the COVID-19 emergency in all regions at the end of September.


The minutes of the July meeting released by the Bank of Japan showed that some policymakers warned that there is a risk of delay in Japan's economic recovery due to the drag on consumption due to the emergency restrictions adopted to combat the new crown epidemic.

The selection of Fumio Kishida as the leader of the Democratic Party actually ensures that he will become the next prime minister of Japan. Fumio Kishida has said that fiscal consolidation will be a major pillar of his policy. He has questioned the Bank of Japan’s ultra-loose policy in the past. In 2018, he said that stimulus measures cannot be sustained.

As the economy is affected by the new crown epidemic, Kishida said that the Bank of Japan must maintain its large-scale stimulus measures. He proposed a spending plan of more than 30 trillion yen, and also stated that Japan may not raise the consumption tax from 10% "in about ten years."

He emphasized the need to distribute more wealth to families, which is in contrast to Shinzo Abe's "Abenomics" policy that focuses on improving corporate profits and hoping to permeate benefits to the working class.

Whether Kishida or anyone else becomes the new prime minister, the monetary easing policy is still on track. It is unlikely that Kishida will withdraw from large-scale monetary stimulus or raise interest rates soon, because doing so will boost the yen.

The Australian dollar is relatively defensive

The Australian dollar against the US dollar exchange rate was relatively defensive, rebounding from the low of 0.7168 since August 23, and finally closed at 0.7258, almost stable. The Australian dollar benefited from the accelerated pace of vaccination in Australia and the recovery of iron ore prices before China’s Golden Week holiday.


New South Wales and Victoria detailed plans to reopen the economy as vaccination is rapidly approaching the goal of two doses for 70% and 80% of the adult population. The decline in retail sales in Australia last month was smaller than expected, during the COVID-19 lockdown. The rapid and continuous acceleration of vaccination means that the retail industry will open again starting next month.

This supports the Reserve Bank of Australia’s optimistic view that economic growth will rebound in the fourth quarter after a sharp contraction almost certainly in this quarter. If this is the case, the Reserve Bank of Australia is expected to cut debt purchases in February.

Ray Attrill, head of foreign exchange strategy at National Australia Bank, said: "We attribute the outstanding performance of the Australian dollar to re-inflation trading and the market’s renewed interest in the economy that coexists with the virus. In recent months, whenever there is doubt about the speed of the global economy’s reopening When it surfaced, the Australian dollar would become a scapegoat."

But the Reserve Bank of Australia still insists that it will maintain interest rates at 0.1% until 2024. Nomura Securities said this is particularly important because the Bank of Australia has already stated a more dovish stance than the Federal Reserve.

Nomura economist Andrew Ticehurst said: "As central banks move toward removing easing policies, any rebound in global market volatility may be good for the U.S. dollar and not good for the Australian dollar."

Westpac strategists wrote in a report: "We still believe that steel production is suppressed... As the Federal Reserve will begin to reduce stimulus in the coming months, (Australian) may reach new lows below $0.7200. ."

New Zealand may raise interest rates for two consecutive months

The New Zealand dollar closed down 0.96% against the U.S. dollar, hitting a new low of 0.6856 since August 23. The market has fully digested the expectation that the Reserve Bank of New Zealand will raise interest rates by 25 basis points this month. Earlier, a number of new crown cases broke out in August, triggering another blockade, which caught traders who were expected to raise interest rates by surprise.


It is also widely expected that the Reserve Bank of New Zealand will raise interest rates again in November. A large number of stimulus measures and a small number of new crown cases have helped the economy recover strongly and pushed inflation to a 10-year high. This shows that the central bank needs to take action to prevent inflation from rising further.

The policy outlook of the Reserve Bank of New Zealand is completely different from that of the Reserve Bank of Australia. If the Reserve Bank of New Zealand does raise interest rates, the country will be ahead of most other advanced economies in the current global tightening cycle.

Jeremy Couchman, senior economic analyst at Kiwibank, said: "The economy is booming, the job market is tight, consumer prices are rising, and housing prices are rising staggeringly: when these things happen, interest rate hikes are imminent. The Reserve Bank of New Zealand has stopped. For the bond purchase plan, the next step was to raise interest rates in August, but due to the Delta outbreak, no action was taken. We expect the Federal Reserve Bank of New Zealand to follow up in October and raise interest rates three times to 1% by February 2022."

The survey shows that the benchmark interest rate is expected to reach 1.50% by the end of next year and 1.75% by the end of 2023. In the next few years, the inflation rate will still be higher than the central bank's intermediate target of 2.0%. It is expected to rise to 2.9% this year and drop to 2.5% next year, but it will remain at 2.2% in 2023.