Markets

FX

Hawkish Fed & China risks point to a stronger dollar

In a choppy week dominated by some surprising central bank announcements and the ongoing uncertainty around China’s property sector, the US dollar continued to make some headway, especially against emerging market currencies. The FOMC delivered another hawkish message, signalling that a taper announcement is imminent and shifting its “dot plot” policy rate projections higher again. Although the dollar has not soared in the way that it did following the June FOMC meeting, US bond yields have risen sharply. We continue to think that a renewed widening of bond yield gaps in favour of the US will drive the dollar higher before long.

24 September 2021

The curious case of the super-stable renminbi

We think that the renminbi’s period of remarkable calm will end before long, and that it will depreciate against the US dollar over the next few months. In view of the wider interest, we are also sending this FX Markets Update to clients of our China service.

24 September 2021

We think China’s equities will continue to struggle

Even if the current concerns around Evergrande abate, we think China’s stock market will continue to underperform many of those elsewhere over the next couple of years.

Drop-In: Evergrande – What are the risks to China and the world? Chief Asia Economist Mark Williams and Senior China Economist Julian Evans-Pritchard will be joined by Senior Markets Economist Oliver Jones to take your questions about the Evergrande situation. They’ll be covering the implications of collapse for China’s financial system and growth outlook, and assessing the global markets fallout. Register here for the 0900 BST/1600 HKT session on Thursday, 23rd September.

22 September 2021
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Data provide mixed signals on Delta impact

The latest data provide mixed signals on the impact that the Delta variant is having on the economy. The high frequency indicators for high contact services suggest that activity levelled out in August and weakened a little in early September. Last month’s retail sales report also revealed that spending on food services was broadly flat, but control group sales nevertheless rebounded strongly, as households refocused their spending online and in favour of goods consumption. Elsewhere, leisure and hospitality employment was unchanged in August which, because that sector had been such an important contributor to the strength of the gains in earlier months, helps to explain why payroll employment increased by little more than 200,000 last month. Finally, even though activity only stagnated, the prices for some high contact service activity like hotels and air fares fell quite sharply. The good news is that, with Delta variant infections having now peaked, we should see some rebound in affected activity and employment soon, although the downside is that could contribute to a renewed pick-up in inflation linked to reopening.

We expect the Aussie dollar to remain under pressure

Growing evidence of an economic slowdown in China reinforces our view that the Australian dollar will fall further against the US dollar through the end of this year.

Debt risks come back to the fore

Problems at Evergrande in China have dominated the headlines recently, but (sovereign) debt risks are brewing in other EMs too. Concerns about higher government spending and rising public debt levels are building in parts of Latin America. Meanwhile, sovereign dollar bond spreads have surged in a handful of frontier markets including Sri Lanka, Tunisia and Ethiopia. These economies all face the worrying combination of large external foreign-currency debt burdens, low FX reserves and weakening currencies. We are most worried about Sri Lanka. While the country will probably muddle through this year, it will face a crunch point in early 2022 when large bond repayments are due. A default is now looking the most likely option.

Worrying more about higher inflation

The recent rises in 2-year and 10-year gilt yields to their highest levels since the “dash for cash” at the start of the pandemic have entirely been driven by the investors revising up their expectations for inflation. Indeed, 10-year break-even inflation rates are now at their highest level since the Global Financial Crisis (GFC). Our forecast that RPI inflation will shoot up from 3.8% in August to just over 6.0% by the end of the year suggests that break-even inflation rates may yet rise further. But they should then drop back next year as the bulk of the rise in RPI inflation is reversed. What’s more, our view that the Bank of England will put more weight on the recent weakening in activity than the rise in inflation and won’t raise Bank Rate until 2023 suggests that a big surge in nominal gilt yields is not around the corner.

Dollar edges higher ahead of the September FOMC meeting

The dollar has risen against most currencies as markets have remained quiet ahead of next week’s monetary policy announcements. In addition to the FOMC, more than a dozen central banks in developed and emerging market economies will meet during a week that may set the tone for FX markets over the coming months. While we doubt that the FOMC will set out a plan for tapering its asset purchases, the new economic projections may shed some light on its reaction function given building cyclical inflationary pressures. Our view remains that inflation in the US will stay elevated for longer than the FOMC and investors currently anticipate, in turn supporting higher US yields and a stronger dollar.

17 September 2021
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