top of page
T3 Group

T3 Monthly Insights - Aug 2023



1. Over the recent month, the dollar exhibited a dynamic performance, oscillating between 103.5 and 105, driven by a mix of positive retail sales, FOMC insights, and robust ISM services data. While Fed Chair Powell's indications of sustained rate hikes and FOMC's optimism bolstered the currency, it faced challenges from adverse prelim GDP and JOLTS data. Despite these headwinds, the housing market showed potential, but manufacturing conditions remained subdued. As the market continues to navigate this landscape, participants are keenly observing key metrics like PMI, unemployment, and consumer sentiments to gauge the overall health of the U.S. economy.


2. The Euro's downtrend persisted through August, concluding the month below the $1.08 mark, primarily attributed to deteriorating PMI metrics across its key economies. Both flash manufacturing and services PMI readings within the Eurozone exhibited stagnation and decline, positioning them within contractionary territory. These indicators collectively signal a sluggish economic environment with a looming risk of recession. Adding to the somber outlook, the German ifo business climate survey underscored unfavorable business sentiments. The ECB's President, Christine Lagarde, reaffirmed the institution's vigilant stance in addressing persistent inflation, which currently exceeds 5%. This resolute approach has exerted downward pressure on the Euro's strength throughout August, contributing to the subdued prospects for the future economic trajectory.


3. Throughout the month of August, the pound sterling exhibited a diverse performance in relation to the dollar, ultimately concluding the month at a level of $1.27. Despite a 25bps rate hike, the market interpreted the Bank of England's shift away from an assertive monetary tightening approach, opting instead for a strategy reliant on incoming data. The expansion observed in the preliminary quarterly GDP figure contributed positively to the pound's trajectory; however, this upward momentum was counterbalanced by subdued Purchasing Managers' Index (PMI) readings and a cautious report from the Bank of England. The currency experienced upward pressure due to escalating wage pressures and CPI figures surpassing expectations, although concerns surrounding consumer spending and a decline in retail sales presented mitigating factors. Ultimately, a decline ensued, driven by disappointing Flash Manufacturing and Services PMI figures, coupled with a decline in the Confederation of British Industry's Realised Sales metric. However, toward late August, the fade in dollar strength, as result of poor JOLTS and Prelim GDP figures, helped pare most of the pound’s losses.


4. Throughout August, the yen sustained a further 3.6% decline against the US dollar, ultimately stabilising near 146 as the month concluded. Following adjustments to its Yield Control Curve (YCC) policy a month prior, the yen underwent consistent devaluation, prompting market leaders to caution that the Bank of Japan's (BOJ) extended dovish stance could lead to continued yen depreciation. To address this concern, BOJ Governor Ueda emphasises the necessity of adhering to the current monetary policy in order to achieve their inflation targets by year-end, particularly in light of a 0.2% contraction in household spending compared to the previous year. Japan, however, finds itself in a trilemma: with a significant holding of its sovereign debt, below-target inflation, and a deeply conservative society that favours saving even in the face of negative prime rates, facilitating interest rate hikes to bolster yen appreciation poses significant challenges for the BOJ.


5. The Canadian Dollar (CAD) demonstrated modest growth during the month of August, but experienced a depreciation of up to 3.6% against the US Dollar, concluding the month at a rate of 1.36. This subdued performance of the currency can be largely attributed to an unexpected decline in employment figures, with a decrease of 6.4k jobs instead of the anticipated 24.6k increase. Additionally, Canada's oil prices retreated to $80/b from July's elevated levels, compounding the currency's challenges. The convergence of factors, including a deteriorating trade balance and decreased core retail sales, contributed to the overall decline of the CAD. Economists are now predicting a significant contraction in Canada's second-quarter GDP growth based on this confluence of factors. The Australian Dollar (AUD) experienced a parallel decline to the Canadian Dollar and depreciated by 3.65% against the US Dollar, settling at approximately $0.64. The initial half of August witnessed a substantial sell-off of the AUD due to disappointing economic data, falling short of expectations. Notably, the employment change data, projected to exhibit positive growth, instead mirrored an equivalent decline. Furthermore, a marginal reduction of 0.1% in the wage price index added to the currency's challenges. Looking forward, market participants are proceeding cautiously in their interactions involving the AUD due to recent developments in the BRICS bloc and the gradual integration of other commodity-driven economies. The New Zealand Dollar (NZD) followed a similar trajectory to the CAD and AUD in August. The currency's decline was influenced by an elevated unemployment rate, diminished PPI q/q input and output figures, and a concerning trade balance of -1,107 million compared to the previous month's -111 million. The Reserve Bank of New Zealand (RBNZ) chose to maintain the Official Cash Rate (OCR) at 5.5%, while signalling the necessity of future rate hikes to address short-term inflation concerns. Based on its statement, the RBNZ anticipates the OCR to remain above 5.5% until 2025.


6. Gold experienced a significant decline in the initial half of August, followed by a subsequent rebound and a month-long rally, eventually ending the month around $1940 an ounce, down close to 8% since the start of the year. The decline was triggered by robust US economic data highlighting a strengthened labour market, leading to a more hawkish stance by the Federal Reserve regarding monetary policy decisions. This shift, along with capital outflows from safe-haven assets, impacted the bullion's value. However, in the latter half of the month, despite Chairman Powell's remarks at the Jackson Hole Symposium hinting at potential monetary policy tightening, money markets are anticipating a deceleration of rate hikes before eventual cuts in the following year. This uncertainty regarding the Federal Reserve's next moves has fueled speculation, prompting investors to seek refuge in gold until the situation becomes clearer. Looking ahead, we can expect to see an appreciation in gold prices as the Feds start cutting rates, with the markets expecting that gold prices will be higher a year from now.


Comments


bottom of page