From the Russia-Ukraine war, China’s zero-covid policy, Europe’s ongoing energy crisis and global supply chain bottlenecks, we are now in what experts call a ‘poly-crisis’. Our own experts put together some key drivers for the month of August that they think will impact the major currencies.
USD
The Federal Reserve raised rates by 75-bps for the second time in two months and signalled the possibility of such move again, cementing the Fed’s commitment in driving inflation lower to the extent of accepting the possibility of negative growth. With no sign of a slowing labour market and weakening prospects in Europe and China, the Fed is likely to maintain its hawkish stance. Aggressive tightening and safe haven flows are likely to result in a stronger USD moving ahead. On the flip side, bearish themes that could pose a threat to the greenback would be the resurgence of Covid-19, poor economic data and inflation eventually peaking out. These would then force the Fed to adopt a more nuanced approach and limit USD’s strength.
EUR
Shortly after hitting parity, the EUR jumped against the dollar after ECB announced its first-in-11-years interest rate hike of 50-bp. The move signaled an active step towards rate normalisation. Nord Stream 1 pipeline, which accounts for 40% of Europe’s total natural gas supply has resumed to much relief. Current flows reduced to 20% pre-maintenance level but supplies might be completely shut off. Italy’s Prime Minister Mario Draghi’s resignation introduced further instability to the situation in Europe. Moving forward, eyes will be on the energy situation in the region, the snap election taking place in September, and most importantly, the effectiveness of the Transmission Protection Instrument (TPI), an anti-fragmentation tool to limit the divergence in borrowing cost across the Eurozone.
JPY
Divergent monetary policy continues to add weakness to the JPY. The very loose monetary policy by BOJ is still touted by Governor Kuroda who affirmed his pledge by emphasising that further easing of monetary policy will be conducted if necessary. He believes the downside risk is short-lived and will eventually balance out. As Japan imports most of its oil, rising oil prices and a weaker JPY would mean that oil is now more expensive than ever. BOJ’s tone is likely to persist in the near future unless economic fundamentals shift extensively and convince the BOJ to adopt a more hawkish stance. Until then, the greenback is will continue to reap gains over the yen.
Key Events
1st August | Europe Monthly Unemployment Rate |
US ISM Manufacturing PMI | |
3rd August | EUR Trade Balance |
EUR Retail Sales | |
US ISM Services PMI | |
4th August | BOE Minutes/Interest Rate Decision |
US Initial Jobless Claims | |
5th August | Nonfarm Payrolls |