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September 2022 - Monthly Economic Outlook

2 September 2022

09-september-img-Featured-blog-annonce-ecoGain an overview of the latest developments on the currency market and anticipate fluctuation risks.

The dollar is king

Inflation did not take a holiday in July and August. It continues to remain at abnormally high levels on both sides of the Atlantic. This encourages central banks to be more aggressive. A 75-basis point rate hike is on the cards for several of them this month (US Federal Reserve, Bank of Canada, European Central Bank). The deterioration in the economic environment, marked by a growing risk of recession in the developed world, is a favourable factor for risk aversion. We remain in a world where the US dollar is king. Since the beginning of the year, it has been marked by its main counterparts: +11.9% against the euro, +9.4% against the Canadian dollar, +7.7% against the Australian dollar. No trend reversal is foreseeable in the medium term, even if the US currency is in overbought zone (which can usually indicate a decline in the short term).

High: 1,0365 Low: 0,9926 Variation: -2,00%

At the Jackson Hole central bankers' meeting at the end of August, Isabel Schnabel, a highly respected member of the European Central Bank's Executive Board, called for aggressive action at the Governing Council meeting on 8 September. Traders now expect a 75-basis point rate hike in the eurozone. However, this will not be enough to reverse the EUR/USD trend, in our view. The prolonged decline remains in place. Our year-end target is unchanged at 0.96. It will certainly be reached when the energy crisis deepens from the autumn (October/November), which could plunge the eurozone into recession. The US dollar remains supported by both more aggressive monetary policy in the United States (the monetary tightening cycle began earlier than in the eurozone), risk aversion on the markets and the fact that the peak in inflation is certainly already exceeded in the US (which is clearly not the case in the eurozone).

Haut : 0,8660 Bas : 0,8339 Variation : +3,26%

The 0.3339-40 area is an important support for the pair. It has been in place for two months. Each time it was hit, this led to a rebound in the pair. This price zone will have to be closely monitored in the coming weeks. In the event of a loss of support, we could see a significant depreciation of the euro against the pound sterling. This is not our central scenario at this stage, however. Rather, we expect to remain in a wide range of just over 150 pips (between 0.8340 and 0.8500). The prospect of a change of prime minister in the UK is a non-event for the foreign exchange market. His or her name will be known on 5 September. At the time of writing, it appears that Liz Truss, the current Foreign Secretary, is the favourite to succeed Boris Johnson (despite her iconoclastic economic ideas).

Haut : 139,99 Bas : 133,40 Variation : +3,17%

In an economic environment that is set to deteriorate (energy crisis in Europe, real estate crisis in China, inflation everywhere, increased geopolitical risk), we believe it is wise to be short (seller) EUR/JPY. Monetary policy should not be a really different element for the pair. The euro is not buoyed by the prospect of more aggressive action by the European Central Bank in September (75 basis points increase in the key rate). Japan's monetary policy is unchanged and remains ultra-accommodative, although Bank of Japan Governor Haruhiko Kuroda has acknowledged that the archipelago should finally come out of inflation for the long term (price hike forecast to reach 2.5-3.0% by the end of the year).

Haut : 0,9837 Bas : 0,9569 Variation : +0,39%

The market environment on currencies is favourable to the Swiss franc, which serves as a safe haven in times of uncertainty (hence a probably lasting drop below parity). Two other factors explain the strength of the CHF: 1) The Swiss National Bank has clearly indicated that it is in favour of a strengthening of the Swiss currency in order to limit the cost of imports and thus reduce imported inflation; and 2) unlike the eurozone, Switzerland is not facing a serious energy crisis. The Confederation is even considering reversing the decision to close all nuclear power plants by 2027 – a decision taken in the wake of the Fukushima nuclear accident in Japan in 2011. We are bearish EUR/CHF in the medium term, with a price target of 0.9420.

Haut : 1,3214 Bas : 1,2876 Variation : +0,12%

The depreciation of the euro against the Canadian dollar continues (-9.7% year-to-date). The Canadian dollar is buoyed by still high energy prices (WTI is up +23% since January, for example) and by a more aggressive monetary policy in Canada than in the eurozone. The Bank of Canada's September 7 meeting is expected to result in a rate hike of at least 50 basis points (an increase of 75 basis points is not excluded). We estimate that the key rate could be 3.5% at the end of the year (from the current level of 2.5%). This will be a decisive factor that will accentuate the fall in the EUR/CAD. Our medium-term target is 1.2447.

Haut : 1,4778 Bas : 1,4281 Variation : +0,04%

The trend is still bearish for the pair. During August, our previous target of 1.4409 was reached. Our new price target is 1.4000 (a symbolic threshold that could lead to a short-term rebound in the pair). From the point of view of the technical analysis (which is monitored by some market participants), the pair is not yet in oversold territory. This seems to confirm the bearish bias. Fundamental analysis is also supportive for the Australian dollar (rising commodity prices and restrictive monetary policy, in particular). We expect the Reserve Bank of Australia's key rate to be close to 4% in 2023 compared to the current 1.85% (after a 50-basis point hike in August).

Haut : 6,9639 Bas : 6,8098 Variation : -0,66%

The foreign exchange market is buzzing with rumours of an upcoming devaluation (not to be confused with depreciation!) of the CNY. It is far from certain. For the moment, EUR/CNH remains in the range we mentioned this summer, between 6.80 and 7.00. It seems that this is the right level for Beijing's authorities in the short term. In our view, a devaluation of the CNY just before the 20th Communist Party Congress (which will lead to the reappointment of President Xi Jinping for a five-year term) seems to us to be a far-fetched hypothesis. This would clearly send the wrong message to foreign investors. This would also run counter to recent statements by the Chinese central bank, which reaffirmed its commitment to exchange rate stability.

High: 414,73 Low: 402,00 Change: +0,40%

In the space of two months, the Hungarian central bank has raised its main policy rate by 200 basis points to 11.75%. This is just the beginning. The recent measures announced will reduce excess liquidity in the markets, which should improve the transmission of monetary policy. This is positive. However, we doubt that this will be enough to support the HUF against the EUR in the coming weeks. The trend is still bullish for the pair. There is still no solution to the dispute between Budapest and Brussels over the release of EU funds. This is an element that weakens the HUF durably. The Hungarian authorities hoped that a compromise would be found by the end of August. This was not the case. As long as this situation persists, it is to be expected that the HUF will be structurally weak against the European single currency.

High: 417,35 Low: 379,53 Change: +2,98%

A reversal of the USD/HUF trend is excluded in the short term. We are facing a foreign exchange market where the US dollar is king (due to its safe haven status). The tightening of monetary policy in Hungary (even if significant) is not sufficient to support the HUF in this market environment. We expect the depreciation of the HUF to continue in the short to medium term. In addition, there are several risks to the Hungarian economic dynamics: the thorny issue of EU funds, the still high inflation, the European energy crisis etc. We believe that by the end of the year the USD/HUF pair could reach the 425.00 level.

Economic calendar

02/09 USD Labour Department Employment Report for August
05/09 GBP The name of the new British Prime Minister will be unveiled
06/09 AUD Central bank meeting
07/09 CAD Central bank meeting
08/09 EUR Central bank meeting
13/09 USD Consumer price index in August (first estimate)
21/09 USD Central bank meeting and macroeconomic projections update
27/09 HUF Central bank meeting

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