The summer is often conducive to financial panic. This year has been no exception. Economic momentum is flagging and some fear a US recession. The results reported by the leading listed companies have been poor, reflecting a decline in global consumption. Central banks are creating a few jitters, partly explaining the panic in equity markets. Fortunately, the currency market is a little calmer, aside from JPY pairs.
It is now widely accepted that the US Federal Reserve (Fed) will cut its policy rate in September. The only problem with this is that each disappointing statistic released before then could trigger a negative reaction by the market. Investors will inevitably repeat the eternal mantra that the Fed took too long to loosen its monetary policy. We saw a reaction of this type last Friday in the wake of US employment figures. In July, the unemployment rate rose sharply. Looking more closely, however, we noted that this figure was biased by the impact of Hurricane Beryl that hit Texas in early July. In reality, the rise in the unemployment rate reflects temporary layoffs related to this climate event. In a highly febrile market, it is therefore necessary to exercise caution and analyse statistics with a little perspective.
At the start of July, according to the CFTC report (the equivalent of the US stockmarket regulator), a growing number of market players took long positions in the GBP. This was almost a consensual trade. However, it did not last long, as investors quickly repositioned by going long on the euro. Even so, the pair remains within its wide range with a pivot zone around 0.85.
In the UK, the Bank of England (BoE) has kicked off its rate-cutting cycle as expected. It is unlikely to decide to lower its rates at each monetary policy meeting, since there is a considerable risk that inflationary pressures will strengthen by the end of the year and push inflation back just above 2%. Inflation in services also remains a problem, as in many developed countries. It stands at over 5% year-on-year.
In July, China cut its policy rate by 10 basis points, but this will only have a marginal effect on economic activity. As long as the property problem persists, with its consequences on the banking sector, growth is set to remain soft. We also have growing doubts that the Chinese authorities want to use the exchange rate as a tool to revive growth. Their priority is to stabilise the yuan.
Quiz time. Equity markets are in freefall, the economy is flagging and there is new talk of a risk of recession. In your view, which currency is benefiting the most from such a market environment? To no surprise, it is the Swiss franc. This currency is up almost 4.6% against the euro month-on-month. In the short term, this trend is likely to continue. We expect risk aversion towards equities (which has repercussions in all markets, including currencies) to continue throughout most of August, if not beyond.
The market expects the Bank of Canada (BoC) to cut its policy rate at each meeting between now and the end of the year. This means that the policy rate could reach 3.5% in January 2025 and even 3% in mid-2025 based on the money market’s expectations (which will probably fluctuate as new data comes out). This is already partly integrated in market prices. The BoC’s September meeting is unlikely to contain many surprises.
For the time being, the Reserve Bank of Australia (RBA) has not changed its monetary policy, maintaining a policy rate of 4.35% - its highest level in 12 years. Inflation is receding but too slowly. The consumer price index fell below the symbolic threshold of 4% in June (3.9%), but inflationary pressures have not abated, especially in services. Added to this, the housing market crisis is not helping things. Some economists – in the minority – anticipate a rate hike before the end of the year.
The yen’s year-to-date performance is back in positive territory against the euro. This is due to interventions by the Japanese authorities for an amount of 5,500 billion yen (around 35 billion euros at today’s exchange rate) in July alone and the policy rate hike decided on by the Bank of Japan (BoJ). This is not really cause for celebration. By raising its policy rate, the BoJ has set off a monetary hand grenade. For decades, investors were able to borrow at zero or negative rates from Japan and invest the money overseas, guaranteeing a handsome return. But this is no longer possible with a policy rate set at 0.25% and likely to be raised further by the end of the year. The problem is that most investors had not hedged their positions. As a result, they are now panicking and massively liquidating their short positions in the yen, one of the main causes of the recent market turbulence. Wait and see what comes next. This could degenerate if central banks do not address this problem in time.
We expect the HUF to stabilise in the medium term. Beware that, however, that economic momentum is slowing in Hungary. This is visible in both manufacturing data and retail sales. This jeopardises the possibility of a jump in GDP in the second or third quarters and could have a slightly adverse impact on the HUF.
In the medium term, we continue to have a long position on the USD. The ongoing economic slowdown – although this should not be exaggerated – combined with mounting geopolitical risk in the Middle East are two major factors causing investors to seek safe haven in risk-free assets, such as the US dollar. Unsurprisingly, however, no currency can dethrone the Swiss franc in these troubled times. This explains the near 5.7% gain by the CHF against the HUF in July, a trend that may well continue throughout most of August.
| DATE | CURRENCY | EVENT |
| 06/08 | AUD |
Central bank meeting |
| 13/08 | USD | US production prices |
| 14/08 | GBP | UK consumer prices |
| 14/08 | USD |
US consumer prices |
| 22/08 | EUR |
PMI activity indicators in the eurozone |
| 26/08 | EUR |
IFO index of the business climate in Germany |