USD
The dollar index reached a level of 103 on Monday, aligning with our previous prediction in our publication. This marks its highest value in over five weeks. The increase was driven by a robust US producer inflation report for July, which surpassed expectations. This outcome has led to expectations that the Federal Reserve will maintain higher interest rates for an extended period.
Earlier data also indicated a slight acceleration in US consumer prices during July, although these numbers fell slightly below what was forecasted. Mary Daly, President of the San Francisco Fed, emphasized that the recent Consumer Price Index (CPI) figures shouldn't be seen as the central bank's victory over inflation. She pointed out that the labor market is still not in a balanced state.
Investors are now focusing on upcoming earnings reports from Home Depot and Walmart. Additionally, the week will feature the release of the Federal Open Market Committee (FOMC) minutes on Wednesday, along with July retail sales and industrial production data. These releases will provide further insights into the future monetary policy direction and the overall strength of the US economy.
EUR
The Euro experienced a slight decline, falling below $1.1, in response to the latest US inflation data. This data has led to increased speculation that the Federal Reserve will need to maintain higher interest rates for an extended period.
The rise in producer prices exceeded market expectations, driven by a recovery in the cost of services. However, both headline and core consumer inflation slowed down more than anticipated. Despite this slowdown, they still remained significantly above the target set by the Federal Reserve.
Currently, the likelihood of a 25 basis points rate hike by the Fed in November stands at approximately 32%.
In the European context, there's a split among investors regarding whether the European Central Bank (ECB) will implement another interest rate increase. Recent data revealed that core inflation in the Euro Area didn't decrease in July as initially projected. However, economic indicators, particularly for Germany, have been indicating a less optimistic economic outlook.
During its July meeting, the ECB made a notable move by removing the guidance that suggested borrowing costs would continue to rise. ECB President Lagarde mentioned that the outcome in September could be either a pause in rate changes or an actual rate hike.
AUD
The Australian dollar dropped below $0.65, reaching its lowest point in nine months due to concerns about property issues and broader economic challenges in China, which is Australia's largest trading partner. The currency is affected because China relies significantly on Australian iron ore, a material used in steel-making, for its real estate sector. This dependence exposes the Australian dollar to fluctuations in the Chinese economy.
On the domestic front, the minutes from the Reserve Bank of Australia's recent policy meeting indicated that the central bank extended its timeline for achieving its inflation target. This suggests that the bank is also planning to maintain higher interest rates for a longer duration.
During its August meeting, the central bank chose to keep its policy rate steady at 4.1%, defying market expectations of a 25 basis point rate increase. The bank's decision stemmed from its desire to have more time to evaluate the effects of previous rate hikes on the overall economy.
JPY
The Japanese yen experienced significant fluctuations on Monday, surpassing the critical level of 145 earlier in the day. This movement stirred speculation among traders about the likelihood of intervention measures being taken. Concurrently, investors were eagerly awaiting various domestic indicators, including Japan's GDP, Consumer Price Index (CPI) data, and trade statistics for the upcoming week.
Recent data from the previous week indicated that producer prices in Japan recorded their smallest increase in over two years, marking the seventh consecutive month of slowdown in July. This comes against the backdrop of the Japanese yen losing approximately 20% of its value since the US Federal Reserve began aggressively raising interest rates in March 2022 to counter high inflation. Meanwhile, the Bank of Japan has maintained a highly accommodative policy stance.
Japan took action in the currency market back in September 2022 when the dollar's value exceeded 145 yen. This prompted the Ministry of Finance to purchase yen and consequently bring the currency pair back to around 140 yen.
NZD
The New Zealand dollar experienced a 0.4% decrease, reaching its lowest value since early November 2022 at $0.5954 on Monday. This decline marks the currency's fifth consecutive session of weakening. The drop was influenced by the dollar index reaching a nearly 103 value, its highest point in five weeks. This surge was triggered by US producer prices rising more than anticipated last month, leading to increased expectations of further tightening by the Federal Reserve in its upcoming September meeting.
At the same time, there is growing speculation that the Reserve Bank of New Zealand (RBNZ) will maintain the current cash rates at 5.5% during its gathering this week. This comes after a series of rate hikes totaling 525 basis points since October 2021.
In terms of economic indicators, headline inflation in New Zealand eased to 6% in the second quarter of 2023, marking the lowest level since the fourth quarter of 2021. Additionally, food inflation slowed to a 10-month low in July. Recent data showed a significant decline in services activity in New Zealand during July, reaching its sharpest drop in one and a half years. Moreover, factory activity experienced its most significant contraction in almost two years.
Adding to the prevailing negative sentiment were renewed concerns about the property crisis in China, a key trading partner of New Zealand. These concerns emerged ahead of a series of economic data releases for July scheduled for the current week.
: Recent Developments in Major Currencies and Central Bank Policies){kind=link}
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