A matter of small dots

Everything is a matter of a few points!

Last Wednesday the EURUSD stopped at 1.1706, two points from its 2021 low, namely 1.1704 on 31 March. Buoyed by positive employment figures in the United States, it appeared to be a given that the US Dollar was going to fall below 1.1700. But the rise of the greenback against the single currency was stopped in its tracks by the publication of the US Consumer Price Index on Wednesday and the US Consumer Confidence Index on Friday. Inflation slowed in July. The US Consumer Price Index has within one month increased by 0.5 %, after a hike of 0.9 % in June. Year-on-year inflation is up by 5.4 %. Excluding energy and foodstuffs, core inflation has grown by 0.3 % in one month, representing the smallest increase since March and thus falling back to 4.3 % year-on-year. Inflation remains therefore high, but these figures remain lower than market forecasts and are contributing to the debate on the duration of this inflationary phase. Sustained inflationary pressure would reinforce expectations that the Fed will begin to taper its asset purchases more quickly than anticipated, as requested by certain members of its Board. Conversely, if inflation does genuinely abate, the official line of the FED would prove correct and the pressure on it could become less, thereby deferring any normalisation of US monetary policy. The publication of another set of economic figures on Friday also weighed America’s currency down. The Index of Consumer Sentiment as compiled by the University of Michigan fell significantly to 70.2 points, compared to 81.2 points last month. And 32 % of consumers now believe that the US economy is going to improve, as opposed to 45 % in July and 50 % in June. Therefore exactly one week after the above-mentioned figures were published, this currency pair is back around its lowest level for the year, and as everything is a matter of a few points, a new benchmark for 2021 was set at 1.1702. On this occasion two points below the previous low of 1.1704.

After rising to 1.0840 on Friday, the EURCHF was pulled down by an aversion to risk which has resurfaced due to the rampant worldwide spread of the Delta variant, the posting of disappointing economic figures in China and an upsurge in instability in the Middle East due to the Taliban’s return to power in Afghanistan, which could be a danger for surrounding countries. The Swiss Franc has hit a nine-month high against the Euro at just above 1.07. The publication on Monday of the Swiss National Bank’s sight deposit figures shows that the SNB has this month taken robust action to keep the Swiss Franc at 1.0700, both at the beginning of the month and over the past week. Without taking into account March 2020 volumes, the volume of sight deposits increased by more than one billion Swiss Francs in each of the first two weeks of the month. And everything points to such intervention continuing this week. This demonstrates that 1.0700 represents for the time being a preliminary red line which the SNB does not want to see crossed.

New Zealand has announced the discovery of another household infected with Covid in Auckland, the first such discovery in six months, and today the entire country went back into lockdown. This announcement decided the Reserve Bank of New Zealand not to approve a widely anticipated increase in its main lending rate, the OCR, at a monetary policy meeting this morning. The OCR therefore remains at 0.25 %, but New Zealand’s central bank clearly intimated that such an adjustment was only a matter of time and would be made this year. With this deferral it revised its OCR forecasts for the coming quarters. New Zealand’s central bank now anticipates that the OCR will be 0.60 % in the fourth quarter of 2021, 1.15 % in the second quarter of 2022 and 1.60 % in December 2022.

The Australian Dollar lost ground against the US Dollar due to the situation in New Zealand and the publication of the minutes of the most recent monetary policy meeting of the Reserve Bank of Australia. It cited the recent spikes in Covid cases which have hindered economic recovery and prefers to act with prudence. The bond-buying taper (QE) scheduled for September may therefore be delayed until 2022.

The most important item on the agenda over the coming days will the publication this evening of the minutes of the most recent monetary policy meeting of the US Federal Reserve in July. During the night, Eric Rosengren and Keel Kashkari, both FED members, called for a tapering of the US quantitative-easing (QE) program. Jerome Powell, the Chair of the Fed, said for his part yesterday that the pandemic had not lifted all the uncertainties around the economy and that there were no new indications that a change in tone was necessary. The official line of the US Federal Reserve is still that the economy is on the right track but remains at risk, the increase in inflation is temporary and the labor market has not yet recovered completely, thus justifying the status quo. The above-mentioned minutes should therefore cast light on the scope of the debate in this regard.