US dollar is waking up

The currency market was quite calm at the beginning of this summer week as it awaited the Fed minutes that will be published on Wednesday. With no catalyst to precipitate major change, currency pairs moved within narrow bands in no particular direction. The lull, however, was short-lived – yesterday (6 September) was much more dynamic (more on that below).

In the US, employment figures for the week were mixed. On the positive side, weekly jobless claims fell to their lowest level since the start of the pandemic, and the US economy created more jobs than expected last month. Less positive is the unemployment rate, which grew 0.1% to 5.9%, above the markets expectations of 5.7%. Investors seemed to focus on the not-so-good and the dollar fell retreated slightly. US unemployment is one of the two indicators that are being closely monitored by the Fed (inflation is the other), and this increase is consistent with the institution’s current wait-and-see approach. The dollar’s decline, while certainly modest, was evident against the major currencies including the yen and the pound sterling, which had not been doing so well previously. In Japan, new COVID-19 cases are on the rise even as the Olympic Games are set to begin in just over two weeks. It is now likely that lockdown measures will be extended within Tokyo Prefecture and that the games will be held with few or no spectators. The dollar had cleared the resistance at JPY 111, but failed to hold on to the gains. The pound sterling, which had been falling since mid-June as a result of the spread Delta variant in the UK, recovered since last Friday thanks to a weaker dollar and primer minister Boris Johnson’s announcement that the main restrictions would be lifted on 19 July. Much is being said about this decision even as the number of new cases is on the rise. The Swiss franc appreciated slightly on the release of US unemployment figures. Against the euro, it is trading at the lower end of the 1.0880–1.1080 range it has been in recently (1.0919 currently). Job vacancies in Q2 jumped 28% year-on-year, and some sectors such as IT are looking for more employees than in 2018. One need to look at other currencies to find more significant movements. The New Zealand dollar rose sharply (+2% in 3 days) after the country’s business confidence index saw a 7% increase in the second quarter. The market is also expecting the New Zealand central bank to raise rates soon. The opposite is going on in Brazil, where the real sits at its lowest level in a month at BRL 5.20 to the dollar. The country is still dealing with the terrible impact of the pandemic, and unemployment has not decreased (at 14.7%, there are two million more unemployed than a year ago). The opposition has called for the impeachment of president Jair Bolsonaro for his mismanagement of the epidemic and for turning a blind eye to irregularities in the purchase of a vaccine. In Turkey, inflation reached a two-year high in June at 17.5%, above all expectations. President Recep Tayyip Erdoğan is doing his utmost to force the central bank to lower interest rates, but the surge in inflation is reducing the bank’s room for manoeuvre. The prospect of a rate cut seems less likely and in recent weeks the Turkish lira has stopped falling and stabilised at around TRY 8.68 to the dollar.

The was much more action in the other markets. Gold had a week of gains, moving from $1,750 an ounce to over $1,800. Against the backdrop of the economic upturn in Europe and the United States, the S&P 500 has risen for seven consecutive sessions and posted several new closing records. And then some news hit like a thunderbolt: few days after its IPO on the NYSE, the Didi group, the equivalent of Uber in China, was sanctioned by the Chinese government, which called for the withdrawal of the application over data security concerns. After the Alibaba/Ant Group affair, the Chinese state still does not look favourably on foreign investors’ taking up a stake in its technological flagships. Didi stock fell by almost 20% following the announcement.

Yesterday the WTI reached a six-year high of $76.98 per barrel. The increase is due to the inability of OPEC+ to reach an agreement to ramp up oil production. Production will therefore remain unchanged although everyone was expecting an increase in quotas to support the global economic recovery. The impasse stems from a disagreement between Saudi Arabia, which wants to increase volumes very gradually so as not to provoke a fall in prices, and the United Arab Emirates, which considers itself to be negatively impacted by the calculation method and would like to be able to produce more. Talks are certainly taking place behind the scenes to avoid a price war, but no new date has been set for a future meeting. After reaching its recent high, and in the same day, the barrel lost three dollars due to profit-taking and certainly also because some traders are betting that the parties will eventually agree on an increase in production quotas.

Coming back to what I said in the introduction, the calm in the currency market was short-lived. Yesterday (6 July), the day after a public holiday in the US, the dollar, which had been languishing, suddenly strengthened. Poor economic figures were published on both sides of the Atlantic. In Germany, industrial order books fell in May and economic sentiment was less optimistic than expected.  In the US, the non-manufacturing PMI also came in worse than expected. The yield on US Treasury notes (10 years) fell from 1.44% to 1.35%, and the dollar rose strongly. For example, the rouble, which could have benefited from the rise in oil prices, has lost value and is trading at RUB 74 to the dollar, compared with RUB 72 at the end of June.