SMATS FX Weekly Market Report | Monday 20 September 2021

SMATS FX is proud to provide our weekly analysis of currency markets and exchange rates.

Over the past week, the USD strengthened against 19 of the top 20 currencies. The only currency it weakened against was the JPY (-0.16). The two most notable movements to the upside were against the ZAR (4.88%) and the AUD (1.82%).
Data wise, we had a few events on the US side last week. Most notable, was the US inflation data on Tuesday, where consumer price index moderated to 0.1% (MoM) and 4% (YoY). On Thursday, we saw retail sales come in much higher than expected at 0.7% (MoM) from a previous figure of -1.1%. This was quite positive for the US.
On Wednesday, we have the US Federal Open Market Committee (FOMC) meeting and the Federal Reserve Bank interest rate decision. This is a major event in the markets, and we expect volatility around this period. Although we don’t expect any change in policy, the tone of the meeting will be closely watched by the market. Any hints of a delay in bond purchase tapering could result in USD weakness.

The Aussie Dollar failed to hold up against developed-market currencies. The GBP/AUD pair appreciated by 0.53% during the week, climbing to 1.8910 from an open of 1.8808.
Australia’s unemployment rate for the month of August was recorded at 4.5%, down from 4.6% in July. However, the declining unemployment can be attributed to a decline in the labor participation rate as opposed to improved conditions in the labor market. In fact, the number of full-time jobs slipped by 68 000, and part-time employment declined by 78 200.
Nevertheless, it appears that consumer sentiment in Australia is improving. The Westpac Consumer Confidence Index increased by 2%, coming in at 106.2 from 104.1 in the month prior. The NAB Business Confidence Index came in at -5 for August, an improvement from the previous reading of -7.
This week will be rather light on the data front. Manufacturing PMI for September will come due along with Services PMI.

Last week, New Zealand released the current account data relating to the second quarter, the GDP growth rate pertaining to the second quarter and the Business NZ PMI for August. The current account remains in a deficit of NZD -1.396 billion, well below the NZD 1.1 billion forecast. The GDP growth rate came out with a 2.8% increase on quarter which is above the 1.4% forecast. The Business NZ PMI for August reflected an index score of 40.1.
The NZD experienced its second consecutive week of weakness against the greenback despite expectations for an increase in interest rates in early October.
There is not too much data being released this week other than the balance of trade pertaining to August. The balance of trade deficit is expected to widen from NZD -402 million in July to NZD -633 million.

Last week, we saw the EUR gain against the GBP, opening at 0.85 on Monday and closing at around 0.852 on Friday. The EUR weakened significantly against the USD and JPY, while remaining volatile against the CHF and NZD.
This comes as the US started its talks on tapering and removing some of its Covid emergency spending. Many other economies, including New Zealand and others in the region, are keeping an eye on their inflation rates to determine their own monetary response.
The main sticking point was continued reiteration from the ECB that inflation is not a cause for concern at present. However, one or two hawks at the ECB have stated that if inflation “surprises them” in terms of duration and size, the ECB will have the tools at its disposal to address it.
The ECB has stated that it has no plans for a taper and may increase the Asset Purchases Program (APP) as the PEPP is downscaled. Analyst and investors will keep a keen eye on the discussions around the EEA budget rules as a change in borrowing mechanisms is expected to account for emergency spending and to prop up the EUR.

The UK inflation rate came in at 3.2% in August, up from 2% in the month prior. Month-on-month figures indicate a price expansion of 0.7%. While the significantly higher reading can be largely attributed to the base effect, the main upward price pressure came from transport, housing and utilities, and recreation.
The unemployment rate lowered in the three months leading up to July, from 4.7% to 4.6%. 183,000 new jobs were added to the economy, further supporting the narrative for the region’s economic recovery.
However, retail sales data did not prove as optimistic. Despite an expected increase, retail sales fell by 0.9% in August, recording a further decline after a 2.8% contraction in July.
The GBP/USD pair shed 0.70% in value during last week’s trade. After kicking off around the 1.3840 mark on Monday, the pair touched lows of 1.3727 before closing at 1.3740.
This week, we have the Bank of England’s (BoE) interest rate decision. The BoE is expected to hold its interest rates at 0.1% in this month’s report. Bond purchases are likely to remain set at £875 billion. GFK Consumer Confidence Index for the month of September is also due for release.

Excessive ZAR weakness ran rampant across the market. The Rand could not hold on to its gains made from the country’s current account surplus two weeks ago. The most noticeable loss is against the JPY last week of 4.75%. This indicates that institutional money is running to safe havens as the grim outlook is phased in for South Africa.
The Rand is currently trading at 20.21 against the British Pound, 14.78 against the US Dollar and 17.31 against the Euro.
This upcoming week will see the SARB interest rate decision on Thursday. The interest rate is expected to stay the same, but if it changes this could have a large impact on the flow of funds in and out of the country. An increase in interest rates could cause the ZAR to strengthen as more money will flow in via institutional trades.

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