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Outlook

13 Jul 2023

Pound hawkishness looks overdone.

The British pound is performing remarkably well, with a substantial shift up in interest rate expectations following a string of better-than-predicted data prints, re-accelerating core inflation, and aggressive Bank of England policy tightening underpinning its move upward. It is holding near ten-month highs against the euro and fourteen-month highs against the dollar, and is the strongest in eight years relative to the yen. But – in contrast to our thoughts around some other currencies such as the Japanese yen and Chinese yuan – we believe there is now a lot of good news factored into the exchange rate. Incoming events...

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13 Jul 2023

Dollar bulls are an endangered species.

US economic surprise indices are sitting at the highest levels since 2020 as incoming data keeps topping forecasts, defying expectations for a policy-induced slowdown. Upheaval in the US banking sector seems to have ended without inflicting lasting damage on lending conditions. Consumer demand remains remarkably robust. Core inflation is still high. Labour markets are hot. Financial conditions are accommodative, and asset prices are melting up.Yet after a record-breaking 11-year bull run, the greenback remains well below its September peak, and selling pressure has accelerated since mid-July’s softer-than-anticipated inflation print led markets to assume an imminent end to the Federal Reserve’s...

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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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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

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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