Weekly Recap August 21 -25, 2023

The week commenced with a disheartening announcement from the PBOC, succeeded by an emphasis on broadly unfavourable PMI statistics and the Jackson Hole Symposium.

During the week, there emerged a phase of heightened risk appetite coupled with a pessimistic outlook on the dollar, which propelled currencies linked to commodities. Nevertheless, the latter part of the week witnessed a significant turnaround in the fortunes of the U.S. dollar.

In case you overlooked the major focal points in the foreign exchange market, here is a summary of the significant occurrences from the previous week's FX undertakings:

USD Pairs

 Source: Finlogix Charts

The week commenced with the dollar finding support through safe-haven flows, triggered by a smaller-than-expected prime loan rate reduction by the PBOC. Despite this initial advantage, the U.S. currency encountered hurdles in maintaining its upward trajectory by the middle of the week. This was despite a surge in 10-year bond yields to record highs in the subsequent days.

Dollar strength notably manifested against the pound, Euro, and Australian dollar on Wednesday, attributed to generally lackluster flash PMI readings from major economies. However, these gains within the day were ultimately overturned as U.S. PMI figures also fell short of expectations. Further dampening the overall sentiment was a report suggesting U.S. payrolls might be revised down by 306,000 jobs from previous estimates.

Nonetheless, the U.S. dollar exhibited a recovery from its weekly lows on Thursday, as traders factored in the anticipation of a hawkish address from Powell during the Jackson Hole Symposium.

Bullish Headline Arguments

Boston Fed President Susan Collins suggests further rate hikes may be needed.U.S. 10-year bond yield breaks October highs, reaching 4.35%, its highest level since November 2007.Weekly initial unemployment claims for the week ending August 18th came in at 230k, lower than the forecast of 242k and the previous 240k.Fed Chair Powell reaffirms the Fed's commitment to maintaining policy at restrictive levels until inflation sustains below 2%, while remaining open to raising interest rates if deemed appropriate.Cleveland Fed President Mester emphasizes the need for more action as core inflation remains elevated.Bearish Headline Arguments

July's Existing Home Sales totalled 4.07M, falling short of the forecasted 4.1M and the previous 4.16M.S&P downgrades several U.S. banks due to concerns over increasing liquidity issues.The Richmond Fed Manufacturing Index for August showed a reading of -7.0, below the forecasted -6.0, with the employment index dropping from 5 in July to -3.Flash Manufacturing PMI for August came in at 47.0, lower than the previous 49.0, while Flash Services PMI was at 51.0, down from the previous 52.3.U.S. payrolls could be 306,000 lower than previously estimated.Philadelphia Fed President Harker sees current interest rates as being at restrictive levels.U.S. Durable Goods Orders for July experienced a decline of -5.2% m/m, missing the forecasted 0.5% m/m, and significantly dropping from the previous 4.4% m/m. However, core durable goods orders came in at 0.5% m/m, surpassing the forecasted 0.3% m/m, and improving from the previous 0.2% m/m.EUR Pairs

 Source: Finlogix Charts

The Euro embarked on the week with a gradual ascent in its value, yet this upward surge peaked and reversed course by Tuesday.

Traders possibly began incorporating the anticipation of lacklustre PMI figures, which could underscore the ECB's recent shift toward a less hawkish stance. Concurrently, the absence of significant Euro-centric catalysts seemingly rendered the currency susceptible to shifts in risk appetite.

Although certain PMI figures for the region displayed positive indications, the overarching outcome for the EUR was a dip in value, barring its performance against the GBP. The pound itself was contending with discouraging outcomes from both its manufacturing and services sectors.

It wasn't until Thursday's London trading session that the Euro exhibited a resolute effort to recover against most of its counterparts. However, it continued to display relative fragility against major currencies, excepting the British pound and the Japanese yen. This persisted despite ECB President Lagarde's speech at Jackson Hole, which could be construed as more hawkish than initially anticipated.

Bullish Headline Arguments

French flash manufacturing PMI increased from a revised 45.1 to 46.4 in August.German flash manufacturing PMI improved slightly from 38.8 to 39.1, exceeding the forecast of 38.9.European Central Bank President Lagarde maintained the possibility of rate hikes and an extended restrictive monetary policy during her Jackson Hole speech on Friday.Bearish Headline Arguments

German producer prices experienced a significant decline of 1.1% month-over-month in July, contrasting with the anticipated 0.1% decrease and the previous 0.3% decline.French services PMI dropped from 47.1 to 46.7 in August, missing the forecasted 47.5.German services PMI plunged from 52.3 to 47.3, indicating a notable shift towards contraction in the industry.Eurozone consumer confidence index slipped from -15 to -16 in August, failing to meet expectations of no change.ECB Governing Council member Mario Centeno noted that previously projected downside risks have materialized.GBP Pairs

 Source: Finlogix Charts

Having enjoyed a promising start to the week, followed by a phase of stabilization, the British pound encountered a sequence of notable setbacks in the ensuing days.

Even though the U.K. did not have a multitude of noteworthy economic events on its agenda, the pound's decline appears to be mainly linked to disappointing PMI data and certain risk-appetite tendencies observed in the middle of the week.

With the persistent signs of difficulties prevailing in the business sectors, it's conceivable that officials from the Bank of England might lean towards a cautious stance in their strategy regarding potential rate hikes. This is the case even though inflation continues to significantly surpass the target set by the central bank.

Bearish Headline Arguments

U.K. Public Sector Net Borrowing in July amounted to -3.48B, deviating from the forecasted -17.2B and the previous -17.11B.Flash Manufacturing PMI for August was reported at 42.5, contrasting with the previous reading of 45.3 and the forecasted 45.1, indicating a more pronounced contraction than expected.Flash Services PMI came in at 48.7 for August, down from the previous 51.5 and below the forecasted 50.9, signifying a transition from industry growth to contraction.U.K. Retail Sales Volumes in August: -44 vs. -25 previous.CHF Pairs

 Source: Finlogix Charts

With limited influential factors stemming from the Swiss economy, the franc's role primarily revolved around acting as a counter currency, being influenced by shifts in market sentiment and the respective drivers of other currencies.

Starting off with a bullish stance due to the disappointing PBOC loan rate cut, the lower-yielding franc eventually relinquished these initial gains on the subsequent day.

Another surge in safe-haven demand propelled the CHF during the middle of the week, largely due to global flash PMIs mostly falling short of expectations. However, this sentiment changed somewhat as weak U.S. PMIs triggered a shift towards risk-on sentiment.

The remainder of the week presented a diverse range of outcomes as various major currencies were guided by their individual influences. For instance, weak U.K. PMIs exerted downward pressure on the pound, while the U.S. currency surged on the back of positive employment data and hawkish remarks from the Federal Reserve.

Bearish Headline Arguments

Swiss trade surplus narrowed from 4.82 billion CHF to 3.13 billion CHF vs. projected 4.50 billion CHF.AUD Pairs

 Source: Finlogix Charts

Despite encountering a few downward fluctuations throughout the week, Australian currency pairs generally exhibited an upward trend in recent days.

The currency linked to commodities underwent a phase of consolidation on Monday, initially witnessing some losses but promptly rebounding after the announcement from the PBOC.

Tuesday marked a notable upswing for the Australian dollar, driven by an increase in risk appetite and elevated iron ore prices. However, it subsequently surrendered a portion of these gains in response to disappointing flash PMI reports.

Midweek, another wave of risk-on sentiment provided a boost to the Australian dollar, known for its higher yields. Nevertheless, it conceded a significant portion of these gains against its lower-yielding counterparts as traders positioned themselves ahead of Powell's Jackson Hole testimony.

In the final analysis, the Australian dollar adeptly retained its leading stance as the week ended, even in the face of a broader decline in risk sentiment during the U.S. trading session. This descent corresponded with Fed Chair Powell's speech during the Jackson Hole Symposium, which arguably carried a prevailing hawkish undertone.

Bullish Headline Arguments

PBOC cut its 1-year prime loan rate from 3.55% to 3.45% vs. 3.40% forecast and kept its 5-year rate steady at 4.20% instead of cutting to the 4.05% consensus.Bearish Headline Arguments

Australia's flash manufacturing PMI dropped from 49.6 to 49.4 in August, and the services PMI decreased from 47.9 to 46.7, indicating a more pronounced contraction.CAD Pairs

 Source: Finlogix Charts

With the exception of the June retail sales figures, there were limited influences affecting the performance of the Canadian dollar over the week. Consequently, the currency associated with commodities found its direction shaped by the broader market sentiment.

The week commenced with primarily lateral price shifts, except in comparison to the yen. Following this, a gradual descent unfolded, driven by risk-averse sentiments prompted by underwhelming global PMI readings.

A subsequent surge of risk aversion materialized as the Jackson Hole Symposium took centre stage, with a notable portion of market participants expecting moderately hawkish declarations from Fed Chair Powell.

Bullish Headline Arguments

Canadian Retail Sales for June recorded an increase of 0.1% month-over-month, reaching C$65.9 billion. This surpassed the estimated decrease of -0.1% and the previous 0.1% increase.EIA crude oil inventories experienced a notable decline of 6.1 million barrels, exceeding the projected reduction of 2.9 million barrels. This suggests heightened demand for crude oil.Bearish Headline Arguments

Canada New Housing Price Index for July: -0.1% m/m (0.0% m/m forecast; 0.1% m/m previous).NZD Pairs

 Source: Finlogix Charts

The New Zealand dollar encountered initial uncertainty during the week, prompted by weak trade data released over the weekend. Nonetheless, it managed to rebound and partially offset the adverse impact of disappointing quarterly retail sales figures from New Zealand.

The Kiwi received a degree of relief from elevated iron ore prices in Dalian, which boosted its performance, enabling it to trail the upward trajectory of the Australian dollar during Wednesday's Asian trading session. Nevertheless, with the publication of global PMI figures, the currency underwent mixed price dynamics.

Surprisingly, the New Zealand dollar actually advanced against the Euro, pound, and dollar during this period. However, these gains were largely surrendered as the commencement of the Jackson Hole Symposium drew near on Thursday, contributing to heightened market volatility.

Price fluctuations on Friday displayed less uniformity, with the Kiwi lacking substantial catalysts from New Zealand. Instead, it reacted to external events, functioning as a counter currency. Nonetheless, it maintained a relatively stable trading pattern and upheld net gains as the weekend approached.

Bearish Headline Arguments

New Zealand's trade deficit widened from 0.11 billion NZD to 1.11 billion NZD in July, primarily due to a 14% decline in exports and a 16% drop in imports.PBOC reduced its 1-year prime loan rate from 3.55% to 3.45%, deviating from the projected 3.40%. The 5-year rate remained steady at 4.20% instead of the anticipated cut to 4.05%.New Zealand credit card spending increased by 3.6% year-over-year in July, indicating a slowdown compared to the previous 5.1% figure and implying weaker consumer spending.New Zealand's headline retail sales experienced a 1.0% quarter-on-quarter decline in Q2, surpassing the projected 0.4% dip. Core retail sales also saw a sharper decline of 1.8% q/q against an estimated 0.2% decrease.JPY Pairs

 Source: Finlogix Charts

At the beginning of the trading week, yen bears were quick to take action, although the specific catalysts for this movement remained unclear. Recurring concerns about potential yen intervention efforts helped limit the extent of the currency's losses.

It's important to highlight that Japan stood out by presenting PMI data slightly better than anticipated, in contrast to most major economies. Additionally, positive figures for BOJ core CPI and news about Japan's Ministry of Finance planning to raise long-term rates for debt repayments likely contributed to providing some support.

Subsequent days witnessed sideways price movement before a notable increase in risk aversion propelled the yen, a lower-yielding currency, upwards. This move occurred as most global PMIs came in below estimated levels.

However, the Japanese currency eventually retraced most of these gains on Thursday and Friday, managing to secure a victory solely against the struggling British pound.

Bullish Headline Arguments

Japan's Ministry of Finance plans to increase its assumed long-term interest rate for debt interest rate payments on the annual state budget to 1.5%, reflecting the rise in government bond yields.

BOJ core CPI saw an improvement, rising from 3.0% to 3.3% year-over-year in July, surpassing the estimated figure of 2.9%.Japanese flash manufacturing PMI inched higher from 49.6 to 49.7 in August, indicating a slightly slower pace of contraction.Tokyo's core CPI recorded a 2.8% year-on-year increase in August, although this figure fell short of the expected 2.9% and the previous 3.0%.Japan's corporate services price index showed an increase from 1.4% to 1.7% year-on-year in July.

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