Hawkish Federal Reserve expectations and safe haven flows after disappointing Chinese data keep the USD’s relentless rally strong.
· China’s trade surplus falls by more than expected, hitting risk sentiment
· USD/JPY rises to a new 24-year high of 144.00
· BoC is due to hike interest by 75 or 100 basis points, USD/CAD rises towards 1.32
Stocks in Europe managed to book a rare up day yesterday, helped higher by the prospect of governments bringing more fiscal support to the table.
Newly appointed British Prime Minister Liz Truss’s draft plan for a huge energy support programme helped push the UK 10-year gilt yields to a decade high as the market weighed the billions in costs. Such high government borrowing could cause investors to dump UK government debt longer term, which could impact the pound going forward. Yesterday the pound booked modest gains. However, these have been short-lived, reflecting concerns over the government’s plans.
Wall Street finished lower after stronger than forecast US ISM non-manufacturing data, which unexpectedly rose to 56.9 in August, up from 56.7. Consensus estimates had pointed to a fall to 55.5. The upbeat data paves the way for more aggressive rate hikes from the Federal Reserve, pulling stocks lower and lifting the USD.
Chinese trade data
Today weak Chinese trade data has hit an already jittery market hard. Chinese trade surplus shrunk more than expected in August amid a sluggish manufacturing sector and ongoing disruptions from COVID lockdown restrictions. The trade balance was $79.39 billion, well below expectations of a $92.7 billion surplus and down sharply from July’s $101.26 billion. Exports grew just 7.1%, more than halving from July and short of the 12.8% growth forecast.
Heading towards the winter months, the outlook for the Chinese economy is increasingly bleak as Beijing sticks to its strict zero-COVID policy. 21.5 million habitants are locked down in Chengdu, and further restrictions are being applied in other places, including Shenzhen.
The dismal data has added to the dark clouds hanging over the market, pulling stocks lower across the board, and oil has tumbled to an 8-month low.
USD
In the forex market, the China proxy, AUD, is falling to 0.67 against the USD, a 5- week low, and is in danger of taking out the 2022 low at 0.6680.
Meanwhile, Hawkish Federal Reserve bets and safe haven flows are a double boost for the USD, which is strengthening across the board. USD/JPY has risen to 144.00 to a new 24-year peak. The relentless rally in the pair shows few signs of slowing as central bank divergence grows. There has been some talk of BoJ intervention to stem the selloff in the yen.
BoC
The BoC surprised the market in July by hiking interest rates by a full 1% to 2.5%, when the market expected a 0.75% hike. The central bank also confirmed that there was more to come. Could we see another hawkish surprise today? Recent data has shown that CPI cooled in July to 7.6%, down from 8.1%, while growth picked up with Q2 GDP rising to 3.3%, up from 3.1%. While a 100 basis point hike was expected following the July meeting, this has since been pared back to 75 basis points.
USD/CAD is trading at 1.3170 at the time of writing as it targets the 2022 high of 1.3220. USD strength and weaker oil prices drive the pair ahead of the meeting.
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