August 2022 - Monthly Economic Outlook

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Gain an overview of the latest developments on the currency market and anticipate fluctuation risks.
Positive interlude

FX volatility has decreased in recent weeks. The main central bank meetings are behind us. Volumes fell automatically during this period of the year. However, the landscape has changed very little. We remain in a market focused on the US dollar. The dollar index, which represents the trend in the dollar against the currencies of the United States' main trading partners, has been up 10.6% since 1 January. This is a little less than it was at the beginning of the year. There was profit-taking. But the trend remains positive for the dollar in the short term due to economic uncertainty (recession or no recession?).

High: 1.0488 Low: 0.9952 Change: -2.32 %

Flows speak for themselves. Investors continue to hold long positions on the US dollar and are short (sellers) on euros. Growth is slowing on both sides of the Atlantic. However, the economic slowdown is more worrying in the eurozone (energy crisis, industrial confidence at its lowest, Italian political risk, engulfed supply chains, etc.). If the energy crisis deepens this autumn, the eurozone is likely to enter recession. This would increase downward pressure on the single currency. The euro fell 2.32% month-on-month against the dollar. This is due to the deterioration in terms of trade resulting from the energy crisis. This is just the beginning. We expect a return to parity soon for the pair. A drop of around 0.90 cannot be ruled out in the event of a breakdown in the supply of Russian gas, for example.

High: 0.8680 Low: 0.8370 Change: -2.44 %

The Bank of England (BoE) will raise its key rate on 4 August. In an intervention on 19 July, BoE Governor Andrew Bailey made it clear that a 50 basis point hike is a credible option (which would bring the key rate to 1.75%). Several factors argue in favour of a significant increase: coordination between central banks (the Federal Reserve, the Bank of Canada, the European Central Bank, etc.) and the level of inflation in the United Kingdom, which are approaching 10%. An increase of 50 basis points is already factored in in the prices offered by the market. This should have little impact on the EUR/GBP exchange rate this week, which is still around its centre of gravity at 0.85.

High: 143.85 Low: 135.54 Change: -4.30 %

In the end, the Japanese authorities did not need to intervene on the foreign exchange market. The yen recovered somewhat. This is good news for the archipelago because it reduces imported inflation (particularly energy products). The reason is that fears of a recession in the eurozone are causing a fairly significant flight from investors (as can be seen in terms of capital flows). It is not certain that the phenomenon will last. However, in the short term, this eliminates the possibility of foreign exchange intervention. August will be a quiet month. There will be no sudden and unexpected surge in the yen.

High: 1.0047 Low: 0.9710 Change: -2.33 %

The euro continues to slide against the Swiss franc. This is good news for the Swiss National Bank (SNB), which wants a strong currency in order to limit imported inflation. This strategy has been successful so far. The Swiss franc has gained nearly 5% over the past three months against the single currency. Eurozone-specific difficulties help a lot (Italian risk, skyrocketing inflation, energy crisis, recession risk, etc.). Fundamentals and technical analysis do not indicate a short-term reversal in the pair. The EUR/CHF is expected to continue its depreciation with a monthly target of 0.9488.

High: 1.3513 Low: 1.3027 Change: -3.09 %

The trend is down with a new price target of 1.2878. Everything argues in favour of a weaker euro: the eurozone faces a faster-than-expected economic deterioration, the energy crisis could lead to a severe recession (in the event of a cut in gas supply by Russia, GDP could fall by 3% in Germany according to estimates by the International Monetary Fund, for example), the Canadian dollar is supported by still high commodity prices and especially by the recent surprise 100 basis points increase in Canada's interest rate, etc. The market configuration is unlikely to change in the short term.

High: 1.5404 Low: 1.4510 Change: -3.51 %

The depreciation of the euro continues. It could even accelerate this week if the Reserve Bank of Australia (RBA) decides to raise its key interest rate significantly on Tuesday. In the minutes of its July meeting published less than two weeks ago, the RBA indicated that the key rate (currently at 1.35%) is still too low to combat persistent inflation. From a macroeconomic point of view, the RBA has real flexibility to tighten its monetary policy (the unemployment rate is at a low point of about 50 years!). Against this backdrop, we are ambitious and expect the key rate to rise by 75 basis points in August (not consensus).

High: 7.0285 Low: 6.7411 Change: -2.27 %

The almost generalised fall of the euro also impacted the EUR/CNH pair in July. Last week, the Chinese government pledged to take further support measures for the economy (as it confirmed that the harmful zero-Covid strategy will remain). We expect further monetary policy measures in the near future (especially a cut in the reserve requirement rate for banks by at least 75 basis points by the end of the year). For the time being, the PBoC seems to be accommodating the trend of the Chinese currency on the foreign exchange market. EUR/CNH's centre of gravity is around 6.90-7.00.

High: 416.85 Low: 393.21 Change: +2.94 %

The level of 393.21 is important for the EUR/HUF pair. It was a support level that was tested several times in June and July, which systematically enabled a rebound. We are still bullish on EUR/HUF (even while the euro faces significant difficulties). The Hungarian central bank tightened its monetary policy drastically again in July, raising its key interest rate by 100 basis points to 10.75% - a high since 2008. For the time being, it is insufficient to support the HUF for the long term and contain inflation (which is still in double-digits). Other rate hikes will occur in the short term. But they will certainly be largely inefficient. The conflict between the Hungarian government and the European Commission is one of the factors (clearly not the only one) which explains why the HUF is less resilient in the current context than the other currencies of the Central and Eastern Europe region.

High: 414.52 Low: 373.98 Change: +5.76 %

Understanding the evolution of the USD/HUF pair is rather simple. Foreign exchange traders are pulling back to the US dollar, which is the only safe asset in times of economic uncertainty. This puts emerging economies' currencies at a disadvantage. But this even further disadvantages the currencies of emerging economies that are facing significant internal issues. This is the case of Hungary (power struggle with the European Commission on respect for the rule of law, high dependence on Russian gas, rampant inflation). According to the International Monetary Fund's black scenario, Hungary could be the worst-performing country in the event of a complete interruption in the delivery of Russian gas to Europe. The drop in GDP could reach 6% (Slovakia is the other European country that will be most affected with a similar decline). In these circumstances, the only short-term surge in the HUF will certainly be a technical rebound.

Economic calendar
02/08 AUD Central Bank Meeting
04/08 GBP Central bank meeting
05/08 USD US July employment report
10/08 USD July Consumer Price Index
16/08 EUR German ZEW August Economic Sentiment Index
18/08 EUR July Consumer Price Index