This week, the dollar index further expanded its uptrend, hitting a new high since late May 2002 to 112.347, and is currently up 2.18% to 112.059. Federal hikes for the third time as scheduled hikes 75 basis points. In addition, the central bank of other countries also raised interest rates significantly. The Swiss National Bank raised interest rates by 75 basis points as scheduled, ending its negative interest rate policy that lasted for eight years; the Bank of England raised interest rates by 50 basis points as scheduled, expectations of global recession strengthened, the dollar's safe-haven status was consolidated, and non-US currencies generally weakened further.
But the only exception is the yen. The Japanese government and the Bank of Japan entered the market to buy the yen for the US dollar, conducting its first foreign exchange intervention since June 1998. The US dollar fell from a high of 145.895 since mid-August 1998, with a cumulative fluctuation of more than 550 points, and are currently slightly down 0.08% to 142.854.
Fed: Unconditional anti-inflation
Fed raised interest rates for the third time this week 75 basis points, Chairman Jerome Powell said that reducing inflation is their "priority focus." "No one knows whether this process will lead to an economic recession, or how severe it will be if it will be. The outlook for a soft landing may be so lower that policies need to be more restrictive, or last longer."
The Fed also expects policy rates to rise higher than expected levels at a faster rate, even if they are slowing down or rising unemployment. The updated median expectation for Fed officials is that interest rates rose to 4.4% by the end of the year, 100 basis points higher than June's forecast; and even higher by the end of 2023, reaching 4.6%. Anders Persson, chief investment officer of global fixed incomes, said: "Powell is drawing a line and is still extremely committed to fighting inflation. He is not worried about the negative effects on the economy at present. The market faces greater volatility and will have to re-adapt to this reality."
The Federal Reserve is fulfilling its promise and setting a roadmap: the economy gives way to monetary policy. Judging from the information the Fed has sent, they will continue to raise interest rates to put interest rates into restricted areas, and the US dollar index has not yet peaked.
Japan's first foreign exchange intervention in 24 years
The Japanese government and the Bank of Japan entered the market to buy yen for US dollars, and conducted its first foreign exchange intervention since June 1998. As the Bank of Japan has ruled out the possibility of a recent interest rate hike, monetary intervention is the most powerful and last resort that Japan has retained to prevent a sharp decline in the yen. But Japan's move is just a temporary measure and is not enough to bring long-term relief to the weak yen.
Deputy Finance Minister of International Affairs Masato Kanda told reporters: "We took decisive action (in the forex market)." When asked whether this means intervention, his answer was yes. Finance Minister Suzuki Shunichi declined to disclose the specific cost of the authorities' purchase of the yen and whether other countries agreed to the move.
London Equiti Capital chief macroeconomician Stuart Cole said: "Given that we have heard many times in the past few weeks that Japan is ready to intervene in the foreign exchange market, the market is expected to take place at some point. But monetary intervention is rarely successful, and I expect today's move will only temporarily ease (the yen decline)." Ben Laidler, global market strategist at
Etoro in London, said: "For the first time in nearly 25 years, hhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhhh Japanese currency intervention is an important step in defending the yen, but ultimately doomed to fail. As long as the Fed maintains a radical hawkish rate hike, any yen intervention may only slow down rather than stop the yen from falling. ”
Bank of voting divergence
pound fell 2.96% against the US dollar to 1.1087, hitting a new low since the mid-1980s to 1.1073. The Bank of England raised interest rates by 50 basis points as scheduled, but 3 of the nine committee members supported the rate hike by 75 basis points, and another one supported the rate hike by only 25 basis points. Voting differences do not help convince the market that the Bank of England is determined to tighten its policies vigorously.
Wall Street Journal commented on the Bank of England's interest rate resolution: The Bank of England raised its benchmark interest rate for the seventh consecutive time, but did not speed up the pace of interest rate hikes, which is the bank's longest rate hike cycle since the late 1990s. Of the nine members of the Bank of England's Monetary Policy Committee, five voted for a 50 basis point hike, three voted for a 75 basis point hike, and one voted for a 25 basis point hike.Different views highlight conflicting concerns and conflicting economic signals faced by Bank of England officials, but this is particularly evident in the UK.
Bank predicts that the UK will enter a recession from the fourth quarter of this year. It is expected that in 2022 and 2023, actual household after-tax income will drop significantly, while consumption growth will turn to negative growth. All indicators show that inflation is very high in the near future, with inflation expected to exceed 10% in the coming months, with inflation expected to peak at a level slightly below 11% in October, and energy price security increases medium-term inflation pressure.
The Wall Street Journal also said: Bank of England officials chose to raise interest rates by 50 basis points because the government has recently taken measures to limit the surge in energy prices, which are expected to help alleviate one of the biggest factors driving inflation in the UK.
Soaring energy prices and a sharp rise in business costs have pushed inflation to around 10%, nearly five times the 2% inflation target. Inflation in the UK is at its highest level since the early 1980s. In addition to the measures already announced, people are expected to cut taxes across the board, with the average energy cost of ordinary households being limited to £2,500 and provide similar support for businesses.
And as manufacturing and services declined in September, the UK's economic outlook remains grim. The Debt Authority (DMO) announced that it will increase the issuance of Treasury bonds to 193.9 billion pounds this year, 60 billion pounds more than originally planned. The surge in UK Treasury yields also failed to boost the pound, and coupled with the strong dollar, the pound may continue its current downward trend.
European inflation is essentially different from that of the United States
Euro fell 2.61% against the US dollar to 0.9751, hitting a new low since October 28, 2002 to 0.9736. Following the Fed, the ECB has followed suit and, after 75 basis points this month, it has some disagreements over whether the pre-rate rate hike is appropriate, although they agree that further action is needed to control record inflation as energy costs soar Europe to recession.
ECB President Lagarde said this week that borrowing costs will rise further in the coming months, "We have taken major steps on the road to normalizing monetary policy, and we expect further rate hikes in the next few meetings."
Lagarde reiterated that the ECB will make a decision based on successive meetings and any action will depend on the upcoming economic data. "Where interest rates ultimately stabilize, and the scale of the steps we take, will depend on how the inflation outlook evolves as we proceed." Lagarde stressed that Europe has not experienced demand-oriented inflation like the United States, and the risk of a spiral of wage prices has been controlled so far.
Swiss End Negative interest rate
USD rose 1.69% against the Swiss franc this week to 0.9804. The Swiss National Bank raised interest rates by 75 basis points as scheduled, and the policy interest rate rose from -0.25% to 0.50%, ending the negative interest rate policy that lasted for eight years, but the Swiss National Bank lowered its economic growth forecast.
The Swiss National Bank expects Swiss economic growth to be around 2.0% in 2022, compared with the forecast for June to be around 2.5%. It is expected that the inflation rate will be 3.0% in 2022 (previously forecasted at 2.8%), the inflation rate will be 1.7% in 2024 (previously forecasted at 1.6%), and the inflation rate will be 2.4% in 2023 (previously forecasted at 1.9%). But the Swiss National Bank's sharp rate hike, coupled with concerns about the recession caused by the Italian election this weekend and rising risk aversion sentiment caused by rising political risks in Europe, could be a catalyst for the short-term positive for the Swiss franc.
In fact, the Swiss franc has historically attracted funds to avoid risks of euro zone recession or political uncertainty. Given the upcoming bleak macro situation, the risks posed by the Italian election and the geopolitical uncertainty caused by the Ukrainian war, the Swiss franc buying demand may recover in the coming weeks.
Canadian inflation fell sharply for two consecutive months
USD rose 2.10% against the Canadian dollar to 1.3543, hitting a new high since July 20, 2020 to 1.3550. Canada's annual inflation rate fell sharply to 7.0% in August from 7.6% in July, a sharp drop in the second straight month. As household debt service ratios may hit record highs, if inflation peaks, it may limit the Bank of Canada's aggressive interest rate hikes.
TD Securities analyst: "The debtors supporting the last two major expansions have ended. As Canadian interest rates are raised, the household sector currently has macro imbalances, and the Canadian dollar will need to act as a pressure relief valve. We expect household debt service ratios to hit record highs by the end of the year, which should prevent the Bank of Canada from keeping up with the Fed. Our expectations for the Federal Reserve's terminal interest rate are well above 4%. We believe the Bank of Canada is approaching their target. We expect Canadian debt problems and interest rate hikes will form an domino effect on economic data in the fourth quarter. There is no positive for the Canadian dollar at present. The Canadian dollar is the worst-ranked currency in all of our currency analysis, and almost all macro drivers tend to be bearish."
This article comes from Huitong.com
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