Foreign Exchange Weekly Review: The U.S. dollar has fallen for two consecutive weeks, and commodity currencies have emerged

This week the US dollar index fell 0.34% to 93.62, and non-US currencies generally rose. The euro rose by 0.36%, the yen rose by 0.64%, the Australian dollar rose by 0.61%, the New Zealand dollar rose by 1.26%, and the Canadian dollar and British pound were almost stable.

There are relatively few data and events this week, and the ups and downs of foreign exchange are greatly affected by risk sentiment. Generally speaking, risk sentiment is higher this week.

Important US data this week was mixed, and the dollar fell for the second consecutive week

The strong growth in business activity in the United States in October indicated that as the new crown epidemic subsided, economic growth rebounded at the beginning of the fourth quarter, but the shortage of labor and raw materials still restricted the manufacturing industry.

Data firm IHS Markit said on Thursday that its US Composite Purchasing Managers Index (PMI), which tracks manufacturing and service industries, rose to 57.3 in early October from 55.0 in September . The index above 50 indicates that the private sector is expanding.

The recovery in corporate activities in October was driven by the service industry. The service industry PMI rose to 58.2 in October from 54.9 in September. Analysts previously predicted that the initial value of the service industry PMI in October is expected to be 55.1. The service industry accounts for more than two-thirds of US economic activity.

The shortage of raw materials has restricted manufacturing activities. The initial value of manufacturing PMI in October fell to 59.2 from 60.7 in September, the lowest in seven months, and was estimated to be 60.3. Manufacturing accounts for 12% of economic activity.

In addition, as of the week of October 16, the number of initial jobless claims decreased by 6,000 to 290,000 after seasonal adjustment, the lowest level since mid-March 2020 , when the United States was in the early stages of the new crown epidemic. .

The number of initial jobless claims fell to the lowest in 19 months and remained below 300,000 for the second consecutive week, indicating that the labor market is tightening, but a shortage of workers may keep the pace of recruitment in October at a moderate level.

This is the most timely data on the health of the economy. People are cautiously optimistic that the federal government subsidy expires on September 6, and the labor force will grow in the coming months.

The number of initial claims for unemployment benefits has fallen from the 6.149 million recorded in April 2020. In a healthy labor market, the number of applicants should be between 250,000 and 300,000. As of the week of October 9, the number of continued jobless claims fell by 122,000 to 2.481 million, which is also the lowest level since mid-March 2020.

After the U.S. dollar index hit a one-year high last week, investors took profits. This week, the U.S. dollar index fell 0.34% to 93.62, the second consecutive week of decline. The dollar's fall was also due to investors' expectations of faster interest rate hikes in other currencies.

(Daily chart of U.S. dollar index)

The Fed's Beige Book calls the economy "moderate to moderate" growth

The Federal Reserve said in its latest economic report compilation Beige Book on Wednesday that US employers reported substantial increases in prices and wages, even though the US economy slowed to grow at a “modest to moderate” pace in September and early October .

This summary of information from the 12 regional Federal Reserve Banks shows that “Overall, the outlook for economic activity in the near term remains positive, but some regions have found that compared with the previous months, uncertainty has increased and optimism has become more cautious. "This Beige Book is part of a series of briefings prepared by Fed policymakers before the November 2-3 meeting.

According to the report, employment has increased. Although wages have risen to attract new employees and retain existing employees, labor growth is still suppressed by an insufficient supply of workers.

Most regions report "substantial increases in prices," some expect high prices to continue, and others expect inflation to ease. The report also said, "Many companies have increased their prices, indicating that in the case of strong demand, the ability to pass on cost increases to customers has increased."

This report will hardly change the current policy course of the Fed. Fed officials are preparing to reduce the $120 billion monthly bond purchase scale as soon as next month. Most officials believe that the labor market has substantially improved since the end of last year.

Fed Chairman Powell believes it’s time to scale back bond purchases

Fed Chairman Powell said on Friday that the Fed should begin to reduce its support for the economy by reducing asset purchases, but should not touch interest rate measures. Although the U.S. non-agricultural data has been significantly lower than expected for two consecutive months, the severe inflation situation has forced the Fed to come to this point.

“ I do think it’s time to reduce debt purchases; but I don’t think it’s time to raise interest rates ,” Powell said in an online appearance before a conference, noting that compared with before the new crown epidemic, the United States is still reducing 5 million job opportunities. He also reiterated his view that as the pressure of the epidemic subsides, high inflation may weaken next year.

Powell said on Friday that if supply chain restrictions ease as expected, the service industry is more fully open, and employment growth accelerates, the Fed’s full employment target is "very likely" to be achieved next year. With the surge in new crown cases, employment growth in August and September slowed sharply.

He said that despite this, it is not certain that if inflation continues to rise, the Fed will “definitely” take action . Inflation has been higher than initially expected and has lasted longer.

The Fed has already hinted that it may start to reduce the monthly purchases of US$120 billion in public debt and mortgage-backed securities starting next month and complete it by mid-2022 .

About half of Fed policymakers believe that interest rates will need to be raised in 2022, and a few believe that interest rates may have to be raised before the summer. The other half of U.S. interest rate setters believe that it is inappropriate to raise interest rates before 2023. Among them, Minneapolis Federal Reserve Chairman Kashkari insisted on raising interest rates in 2024.

Japan’s September core CPI rose year-on-year for the first time since the beginning of the epidemic, and the yen closed weekly

Japan's September core consumer price index (CPI) rose year-on-year, the first time since the beginning of the new crown epidemic in March 2020, indicating that rising energy and raw material costs are gradually pushing up inflation.

Analysts expect that rising fuel costs will accelerate consumer inflation in the next few months, although any growth will be modest compared with other advanced economies, because sluggish wage growth drags down consumption and makes companies afraid to make a big difference. Raise prices.

Capital Investment Macro Analyst Tom Learmouth said, “Due to artificial distortions and one-off blows, we expect the underlying inflation rate to reach a peak of slightly less than 1.0% early next year and then fall back.”

Government data released on Friday showed that Japan’s core consumer prices, which include oil products but excluding fresh food prices, rose 0.1% year-on-year in September, in line with the median market estimate. It was flat in August.

The increase was mainly driven by a soaring 7.4% in energy costs, which was the largest annual increase in the past three years. The cost of gasoline in September surged 16.5% from the same period last year.

The dollar rose against the yen this week, closing down 0.64% to 113.49, ending the four-week-old upward trend due to the decline in the dollar and rising inflation in Japan.

(Daily chart of USD/JPY)

British public inflation expectations soar to record highs

The data shows that the British public, who believes that inflation will accelerate in the next 12 months, set a record, which may further increase people's expectations for the Bank of England to raise interest rates next month.

Specific data show that among the people surveyed by consumer research company GfK this month, about 48% of respondents expect prices to rise at a faster rate in the next 12 months, which is higher than the 34% in the September survey. This is the highest percentage since records began in January 1985.

Prior to the surge in inflation expectations, natural gas prices have soared in the past month, leading to the closure of several energy suppliers in the UK, and British households may face high bills in 2022.

The global supply chain issues that have emerged as the world economy restarts from the epidemic blockade, and the increasing labor shortage due to Brexit, have exacerbated the recent inflationary trend in the UK.

The Bank of England has stated that it expects the inflation rate to exceed 4%, more than twice the target, and then soon fall back.

Economists are increasingly predicting that the Bank of England will become the first major central bank to raise interest rates, which may be announced at the next policy meeting on November 4.

Bank of England Governor Bailey said on Sunday that the Bank of England will have to act if it sees a surge in inflation expectations over the medium term. The central bank last month defined medium-term inflation expectations as five to 10 years from now.

Another survey showed that the British economy unexpectedly regained momentum in October, and cost pressures rose the most in more than 25 years. This may also encourage the Bank of England to raise interest rates for the first time since the epidemic.

The IHS Markit/CIPS UK Comprehensive Purchasing Managers Index (PMI) in October rose to 56.8 from 54.9 in September, the highest level since May. In contrast, economists had predicted that the index would further slow down to 54.0.

The rise in PMI was mainly boosted by the service industry, as consumers and businesses accelerated spending. The tourism industry has benefited from the relaxation of travel restrictions due to the epidemic.

The activity of the service industry surpassed the activity of the manufacturing industry by the largest extent since 2009. As manufacturers were once again trapped in supply and personnel shortages, they almost stagnated.

UK retail sales unexpectedly drop in September

Despite British car owners rushing to refuel their cars, retail sales in September unexpectedly fell for the fifth consecutive month, adding to the signs that the British economic recovery is losing momentum.

Official data released on Friday showed that retail sales in the UK in September fell 0.2% from the previous month, and analysts forecast a 0.5% increase. Retail sales in September were down 1.3% from the same period last year , but were still 4.2% higher than in February 2020 before the UK entered the lockdown.

This marked the longest consecutive monthly decline in history since the data was introduced in 1996.

Retail sales in the UK grew strongly in the first half of this year, because the lockdown on stores was first relaxed. However, retail sales have declined recently, partly because people have increased their social spending after the relaxation of bar and restaurant blockade rules.

The pound was weak this week, and the weekly line was almost stable. On Friday, the pound was dragged down by retail sales data, but the upward trend was not affected by the decline.

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

The minutes of the Reserve Bank of Australia meeting say there will be no interest rate hikes until 2024

The minutes of the Reserve Bank of Australia meeting on October 5 released on Tuesday showed that after the Delta Covid-19 pandemic interrupted Australia's economic recovery, the Reserve Bank of Australia expects that the economy will return to growth this season, but it still does not expect to raise interest rates before 2024.

Meeting records show that this wave of economic rebound will be slower than the rate of recovery after the first wave of the epidemic a year ago.

The committee discussed the boom in housing prices and credit at the meeting. The committee believes that although tightening monetary policy will cool the housing market, it will also lead to unacceptable consequences of reduced employment and reduced wage growth.

The Reserve Bank of Australia lowered the official overnight call rate to a record low of 0.1% last year to support the economy during the epidemic. Since then, it has stated that it does not expect to raise interest rates until 2024, given wage growth and low inflation.

However, the market has always shown that interest rates will be raised before 2024, especially in neighbouring New Zealand, and some other central banks have already begun to tighten their policies.

Under this circumstance, the New Zealand dollar rose more than the Australian dollar this week, the New Zealand dollar rose 1.26% to 0.7156 this week, and the Australian dollar rose 0.61% to 0.7466 this week.

(Australian dollar against the dollar daily chart)

New Zealand's third quarter inflation rate hits more than 10-year high

Data released on Monday showed that New Zealand’s third-quarter consumer price index (CPI) rose 2.2% from the previous quarter, a higher-than-expected increase. Driven by housing-related costs and other supply constraints, it soared at the fastest rate in more than a decade.

Statistics New Zealand said in a statement that as of the September quarter, the CPI rose from 1.3% in the second quarter to 2.2%, the largest quarterly increase since the 2.3% rise in the December 2010 quarter.

In the third quarter, the CPI surged 4.9% over the same period last year, which was also the largest year-on-year increase in more than a decade. The increase in the previous quarter was 3.3%.

The data exceeded analyst estimates and the Reserve Bank of New Zealand's forecast, both of which expected the CPI to increase by 1.4% quarter-to-quarter and 4.1% year-on-year in the third quarter.

Statistics New Zealand issued a statement stating that the main driver of inflation is housing-related costs, such as the construction of new houses.

Vegetable prices, transportation costs and fuel prices are the second largest drivers. Auckland, New Zealand's largest city, has been under lockdown since mid-August to control the Delta mutant strain.

The Reserve Bank of New Zealand raised interest rates earlier this month and signaled further policy tightening. The Fed hopes to keep the inflation rate within the target range of 1-3% and cool the hot real estate market.

The New Zealand dollar rose by 1.26% this week, supported by a fall in the US dollar and a rebound in risk sentiment, it is expected to rise further in the future.

(New Zealand dollar against the US dollar daily chart)