Monthly Review – September 2021
“September was a landmark month for currency markets, as Norway became the first developed nation to raise rates amid a loosening of pandemic restrictions across the world. Market participants feel that the Federal Reserve will soon follow suit by raising interest rates next year. This sentiment has sent the dollar surging ahead of this year’s final quarter despite the very real possibility that the US government will be sent into a shutdown if the debt ceiling is not raised in time. With supply chain uncertainty all around, lawmakers may find it challenging to tighten policy.”
As September draws to a close, the Democrat incumbent faces the prospect of a government shutdown over a budgetary crisis. The Senate will vote on a stopgap funding bill this week but GOP lawmakers are likely to reject it. Additionally, in the House, Nancy Pelosi aims to pass the $550 billion infrastructure bill and Biden may have to shave his $3.5 trillion economic packages in the face of liquidity problems. At the start of the month, Biden found himself defending the US withdrawal from Afghanistan as a watershed moment in US foreign policy amid fervent international criticism. A new Covid-19 travel policy welcoming vaccinated travelers was detailed to begin from November. More recently, a new security pact between the UK, Australia, and the US, was announced, dubbed “AUKUS”, for the sharing of nuclear-powered submarine technology and causing geopolitical tensions. With the resurgence of Covid-19 in the US, employees of US companies will need to prove records of vaccination or submit to weekly testing to be allowed to work in the office.
A fuel shortage in the UK spells a difficult end to September, with petrol stations operating with limited supply across the country, as the government suspended competition restrictions on fuel companies to increase supply at the pumps. The Prime Minister opted for a major cabinet reshuffle to refresh his top team as he looks forward to setting a positive tone ahead of the 2024 General Elections. Liz Truss was a clear winner as the new Foreign Secretary, whilst Dominic Raab gained three jobs in one day as Justice Secretary, Deputy PM, and Lord Chancellor. UK inflation hit 3.2% this month, 1.2% more than the target. The Prime Minister also raised National Insurance, bringing the UK’s tax burden to a 70-year high, as a measure to raise funds for the NHS and social care. Similar to US counterparts, Boris Johnson and then-Foreign Secretary Dominic Raab faced a barrage of criticism from MPs in Westminster over the government’s handling of the withdrawal from Afghanistan.
Compared to a month ago, GBP is lower against the dollar and the euro. The pound started the month on a firm footing, despite a dovish tone from the Bank of England and persisting uncertainty around Northern Ireland’s border. Modest gains brought by the BoE’s early 2022 interest rate hike decision were short-lived on dismal economic data, with GDP growth slowing to just 0.1% in July. The announcement of the biggest tax hike in a generation weighed on the pound. In the middle of the month, we found that inflation hit its highest in almost a decade after a record jump that was largely fuelled by a rebound in restaurant prices. But concerns about economic recovery persisted, with retail sales shrinking 0.9% in August, despite the expected gain of 2.5%. Towards the end of the month, GBP jumped in line with the Bank of England’s hawkish tone but analysts struck a cautious note on the currency as Britain struggled with supply chain chaos due to a shortage of truck drivers. A perfect storm of the fuel crisis, high inflation, risk-averse sentiment, and global growth concerns sent the pound plummeting, and even Andrew Bailey’s reiteration of the Central Bank’s hawkish intentions have not stopped the pound from sinking to an 8-month low.
The euro is weaker against the dollar and stronger against the pound than it was a month ago. At the beginning of the month, the eurozone registered the highest inflation increase in a decade, which pumped the bond yields up. As a result, market participants were covering their bearish bets on the euro, and the single currency went up. The ECB guidance capped the gains by indicating that asset purchases will continue until rate hikes are necessary. As expected, the central bank then announced plans to slightly reduce the pace of bond-buying under its emergency scheme – a token step toward unwinding fiscal support – supporting the euro. German election results only resulted in uncertainty about who will form the next government, with little reaction by the euro. Towards the end of the month, key fundamentals started to betray the loss of momentum in the eurozone recovery, undermining the mood around the shared currency. Nevertheless, consumer confidence rose unexpectedly, amid trouble in services, retailing, and industry, with manufacturers lowering production expectations amid persistent supply bottlenecks.
The dollar is higher than a month ago versus most major currencies. August ended with the Jackson Hole symposium and early September saw a softening of the dollar on dovish Fed comments regarding the winding down of asset purchases. This was set against the backdrop of the world’s largest economy creating the fewest jobs in seven months in August, which was especially significant since labour data had been positioned as a determinant of the tapering calendar. Policy outlook and the safety flows then lifted US Treasury yields, allowing the greenback to recover the earlier losses. A flurry of economic data followed, provoking some volatility: soft inflation data weighed on the dollar, while the retail sales and the business sentiment provided support, rekindling bets on an earlier policy tightening. The uncertainty caused by solvency issues of property developer Evergrande sparked a flight to the safety of the dollar. Meanwhile, the Fed set the stage to start tapering bond purchases in November and at a faster rate than previously expected. Its hawkish tone was offset by the improving risk sentiment, which lifted global equities and pressured the dollar. In the last days of September, high Treasury yields made the greenback more attractive to investors than its peers – the dollar climbed to 2021 highs while the other G10 majors weakened.
The loonie dipped ever so slightly against the dollar and the euro but remained stable against GBP. The Canadian dollar has remained very consistent against USD in the past month hovering at 0.79 CAD to 1 USD over the last 30 days, with very little variation on either side of that figure. September saw a very slight downward trend in the value of the currency, despite a contraction in the Canadian economy as gross domestic product fell at an annualized pace of 1.1% from April to June. This contraction went against the grain as the OECD predicted a strong and uninterrupted rebound to the Canadian economy, with estimates for growth at 6.1% for 2021 and 3.8% for 2022. The longer-term trend has been a similar story of stability, with a high watermark of 0.82 in April 2021 dipping to 0.79 at present. The loonie has avoided fluctuations caused by election jitters after Justin Trudeau was re-elected but his Liberal Party fell short of a majority in a snap election. A 62% voter turnout was impressive across the country amid Covid-19 fears and challenges, however polling this week suggests that only one in ten Canadians are happy with the outcome of the election.
The Australian dollar started September off on a high, at 0.74 AUD to 1 USD to be exact. However, since then it has slowly been declining with somewhat bigger falls at the end of the month. This fall is more pronounced towards the US dollar than the euro or the sterling. Some of this decline can be attributed to the Reserve Bank of Australia’s announcement that it is not likely to raise its benchmark rate until 2024, which is about the time it sees actual inflation within the 2-3% target range. Australia has also experienced lower than expected trade volumes, which suggests that traders are shrugging off the better-than-expected Australian Retail Sales data this month. These factors, in addition to multiple cities announcing new Covid lockdown measures and Australian magnate, Gina Rinehart’s, warning that Australia is falling from prosperity to poverty because of political big-spending and regulation all seem to have contributed to this fall.
What to look out for this month:
• 1 Oct: EUR Retail Sales (YoY)(Aug)
• 1 Oct: EUR Consumer Price Index – Core (YoY)(Sep)
• 4 Oct: EUR ECB’s Schnabel speech, Eurogroup meeting
• 5 Oct: EU EcoFin meeting
• 8 Oct: US Financial Policy Committee meeting
• 8 Oct: US Unemployment rate (Sep)
• 11 Oct: UK GDP (MoM)
• 14 Oct: European Council meeting, Economic bulletin
• 14 Oct: IMF meeting
• 15 Oct: European Council meeting
• 20 Oct: Fed’s Beige Book
• 21 Oct: EU & UK consumer confidence
• 26 Oct: ECB Bank lending survey
• 28 Oct: ECB Interest rate decision
This document has been prepared solely for information and is not intended as an Inducement concerning the purchase or sale of any financial instrument. By its nature market analysis represents the personal view of the author and no warranty can be, or is, offered as to the accuracy of any such analysis, or that predictions provided in any such analysis will prove to be correct. Should you rely on any analysis, information or report provided as part of the Service it does so entirely at its own risk, and Frank eXchange Limited/Manor House Foreign eXchange Limited accepts no responsibility or liability for any loss or damage you may suffer as a result. Information and opinions have been obtained from sources believed to be reliable, but no representation is made as to their accuracy. No copy of this document can be taken without prior written permission.
Source: Ballinger & Co.