Convergence of Fed-ECB Interest Rate Biases Sends Dollar Lower
October 26, 2022
The dollar has prospered throughout 2022 largely because the Federal Reserve had been seen as more aggressive in raising interest rates than the European Central Bank and other central banks. Today’s main market theme is that perhaps the monetary policy gap will not be as wide as thought previously.
- The ECB Governing Council will likely announce tomorrow a second straight 75-basis point rate hike and also unveil plans to reduce the size of its balance sheet.
- Investors continue to react to a story reported in the Wall Street Journal that FOMC officials are starting to consider smaller-sized increments in its rate-tightening cycle.
- The Fed’s tightening is already exerting a discernible effect on the housing industry. House price inflation measured by the FHFA and Case Shiller indices fell sharply in August, and the U.S. 30-year fixed mortgage rate has soared in the past two months from 5.65% to a 21-year high of 7.16%.
- Investors are relieved that Liz Truss is out as British Prime Minister and been replaced by Rishi Sunak, who has more orthodox fiscal ideas. The unveiling of Sunak’s economic strategy has been moved from October 31 to November 17.
- The dollar’s relentless appreciation this year is created several economic strains in other economies. Aside from eliciting monetary restraint, the Bank of Japan last month awakened the threat of foreign exchange market intervention to stymie the dollar’s rise. The yen remains stronger than the key 150 per dollar threshold and is currently hovering around 147. Moreover, a sharp 1.8% drop of the dollar against the Chinese yuan overnight is being ascribed to possible intervention by the People’s Bank of China.
The U.S. currency today also also fallen by 1.3% and 1.2% against the Australian and New Zealand dollars, 0.8% relative to sterling, 0.6% versus the yen, and 0.5% against the euro, Canadian dollar and Swiss franc. The euro and sterling hit 6- and 5-week highs, and the weighted DXY dollar index declined 0.6% today to a 3-week low.
U.S. equities especially in the tech sector are poised to open significantly lower following Microsoft’s sober comments on the outlook for its earnings. The company’s share price slumped 6% in after-hours trading on Tuesday. European stock markets are lower but not by as much as key U.S. indices in futures. In the Pacific Rim, equities closed up 1.3% in New Zealand, 1.0% in Hong Kong, 0.8% in Singapore and China and 0.7% in Japan.
At 3.64%, the ten-year British gilt yield is up two basis points today but a full percentage point below its 52-week high touched earlier this month. While the 10-year U.S. Treasury yield fell 5 basis points overnight, comparable sovereign debt yields are up 6 basis points in Italy, 4 bps in Spain and 2 basis points in Germany.
Prices for WTI oil and gold have risen 1.1% and 0.6%, and Bitcoin has jumped by 2.3%.
The U.S. merchandise trade deficit widened 5.7% on month to $92.22 billion in September according to its preliminary estimate. This was the largest goods deficit since $99.26 billion in June.
Australian CPI inflation accelerated 1.2 percentage points to a 129-quarter high of 7.3% in the third quarter. That was up from 3.0% in the third quarter of 2021 and 0.7% in 3Q 2020, and it’s well above the 2-3% target.
Japan’s August leading and coincident economic indicators were each revised somewhat upward to 4- and 39-month highs. Corporate service prices in Japan in September reversed August’s 0.1% monthly downtick, resulting in a 3-month year-on-year high of 2.1%.
South Korean business confidence slipped two index points to a 24-month low of 73 in October versus 95 at the end of 2021.
Factory output in Singapore stagnated in September, resulting in a smaller-than-expected 0.9% rise compared to the same month a year earlier.
Investor sentiment toward Switzerland rebounded to a 2-month high reading in October of -53.1 from -69.2 in September.
French consumer confidence in October printed at 82 and surpassed expectations of additional slide. A reading of 79 in September had matched July’s 9-year low. Confidence remains down from a pre-pandemic high of 106 in November 2019 and a long-term average score of 100.
Sweden’s trade balance swung from a SEK 25.9 billion surplus in January-September 2021 to a SEK 27.5 billion deficit over the first three quarters of 2022.
There have been a number of central bank policy reviews today:
Officials at the National Bank of Kazakhstan raised their policy interest rate by 150 basis points to 16.0%, which is more than a 7-year high and which follows seven increases between July 2021 and July 2022 totaling 550 basis points. CPI inflation in Kazakhstan accelerated to a 75-month high of 17.7% in September from 16.1% in August and 8.4% at the end of 2021. Food costs were up 22% in the latest month from a year earlier. “Increased inflationary expectations are putting pressure on prices and consumer behavior. All of this requires tighter monetary conditions to keep inflation under control in 2023.”
Officials at the Central Bank of Namibia hiked their key interest rate by 75 basis points to a 31-month high of 6.25% today, citing a need to anchor inflation expectations and safeguard the 1:1 peg of Namibia’s currency to the South African rand. The cycle of rate increases began eight months ago from a pandemic and record low of 3.75%. The new 6.25% level is below the latest CPI inflation reading of 7.1%, and officials remain open to tightening further as needed.
The National Bank of Georgia’s policy interest rate was left unchanged at 11.0%, its level since a 50-basis point hike in March. 11% is up from a pandemic low of 8.0% but still lower than CPI inflation of 11.5% last month. That was up from a 14-month low of 10.9% in August. Officials think inflation is cresting and expect such to recede next year, but they promise not to ease until clear disinflation is observed.
Tajikistan’s first central bank interest rate cut in 27 months was announced today, a reduction of 50 basis points to 13.0%. A 25-basis increase in August had punctuated 275 basis points of tightening going back to 2021. The cut follows a drop in on-year CPI inflation from 8.3% in July to 5.7% in September.
Still Ahead: Bank of Canada expected to hike interest rate further.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Australia CPI, Central Bank of Namibia, Japanese corporate service prices, National Bank of Georgia, National Bank of Kazakhstan, National Bank of Tajikistan, U.S. trade balance
ShareThis
