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13 Jul 2023

13 Jul 2023

Short term gain could bring long term pain.

For the pound, the path forward is heavily contingent on the performance of the UK economy, and to a lesser extent how the Eurozone economy is travelling. Hence, from our perspective, a more positive outlook would require the economy to continue delivering positive surprises relative to market consensus. This may result from ongoing resilience in household consumption, or an upswing in business investment. Ongoing strength, combined with stubbornly high inflation could see the Bank of England press on with additional aggressive interest rate hikes. While positive in the short term for the exchange rate, over the longer run, this could...

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13 Jul 2023

Tail risks have diminished.

European gas prices remain historically elevated, but have fallen to an 18-month low, and storage levels are tracking well above seasonal averages after a concerted push to lower usage and diversify supply relationships beyond Russia. Although Germany’s decision to phase out nuclear reactors has left the bloc’s largest economy vulnerable to volatility in global fossil fuel prices, new liquified natural gas terminals and storage facilities should limit the likelihood of another energy shock in the winter months. This should reduce pressure on headline inflation, lessen the need for another round of aggressive monetary tightening, and improve underlying consumer confidence levels...

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13 Jul 2023

Stimulus efforts could prove disappointing.

The yuan and a range of risk-sensitive asset classes could confront a bearish situation if China’s economic rebound continues to stutter along and no substantive support measures are implemented. Weakening domestic growth momentum – at a point when other major economies are facing recession risks – could dampen global growth forecasts and create a negative feedback loop. If global inflation fails to meaningfully slow, forcing developed-economy central banks to tighten monetary conditions even further, growth projections might fall as interest rate expectations move higher. This could weigh on China’s export outlook and push the dollar higher than expected.

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13 Jul 2023

The Canadian dollar is outperforming.

Fiscal support, stabilising financial conditions, and a historic surge in immigration are helping the Canadian economy – and the loonie – defy bearish expectations. Continued labour market tightness, rebounding housing markets, and high levels of consumer consumption have combined to deliver remarkably-robust growth rates. Although the Bank of Canada’s latest Business Outlook Survey showed excess demand and labour shortages coming down to pre-pandemic levels, its Consumer Expectations Survey revealed an improvement in household confidence, with many respondents expecting wages to rise, interest rates to fall, and home prices to climb over the coming year. The central bank has responded to...

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13 Jul 2023

A stable global economy could provide support.

For the Australian dollar, a more bullish scenario than our baseline outlook would stem from China’s economic revival exceeding expectations – particularly if it is led by a policy-induced upswing in commodity-intensive infrastructure spending. Stronger momentum in China would be a positive impulse for Australia’s terms of trade, the domestic and regional economies, and the currency. In our opinion, the Australian dollar could also outperform if the global economy remains resilient in the face of tighter monetary and credit conditions, and inflation decelerates substantially without aggressive policy actions inflicting much damage on labour markets or generating financial stability risks. However,...

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