The dollar continues to appreciate against most currencies: this is manifested by the fall of the EUR/USD pair under 1.17. The dollar has been the strongest against the main currencies since November last year; last week's correction in its strength was more than erased. At the moment and in the current market environment, there are few alternatives for the US currency. This does not change the fact that it will be difficult for it to maintain the recently gained area in a broader perspective.
What the market has learnt from the minutes of the Federal Reserve's July meeting is the conviction of the majority of policymakers that the progress of the post-pandemic economic recovery will be sufficient to start tapering the monetary stimulus this year. This is hardly news, we believe that the fate of the asset purchase programme has been decided for a long time, and such a move is very well "digested" by the market. The fact that investors react to such information only proves how strong the sentiment towards the dollar is at the moment.
Investors avoid risky moves
The pandemic fears looming in the background and concerns about the prospects for economic growth, which will not be able to count on further massive support in the form of fiscal easing and massive government spending, make the so-called safe havens strong. The EUR/CHF pair is close to 1.07. The Scandinavian currencies, which are sensitive to the global economic situation and the commodity block: NZD, AUD and CAD are experiencing strong drops.
Investors were also knocked off their feet by news from the Antipodes. First, a single case of coronavirus prompted the government to impose a three-day nationwide quarantine (one week in Auckland). Later, the central bank abandoned its announced interest rate hike due to epidemic risks (compounded by low vaccination rates). The New Zealand dollar has lost as much as 2.5% this week, and tonight it was at its cheapest against its US counterpart since autumn. These events not only plunged the currency, which in market jargon is referred to as the kiwi (from a bird rather than fruit) but also planted the seeds of doubt that the same could happen in other cases.
US data fail to clear up doubts
US retail sales began the new quarter with a stronger-than-expected decline. The month-on-month growth came in at -1.1%. In addition, the data came in at a lower rate when excluding expenditures on cars, fuel, restaurants and construction materials. However, this may be due to the fact that deferred demand for goods has been largely satisfied, and consumers are spending more on services. The boom in consumption, which grew by almost 12% in the previous quarter, is probably behind us. The gradual phasing out of emergency, crisis-related social transfers and the fact that the pandemic slump in GDP has been recovered also contribute to this.
In contrast, manufacturing performed very decently, especially goods production, despite the continuing disruption to global supply chains. On the one hand, the sector has been more resilient to the downturn than services. On the other hand, companies will still have a long time catching up with the delays accumulated in previous months. Recent data from the US economy do not provide a clear picture of its condition.
Let us summarise:
- employment is growing at the fastest rate for a year
- inflation is high, but price increases have lost momentum
- consumer sentiment has suffered one of its strongest slumps in recent years
- retail sales are slowing down
- industry (like the rest of the world) is doing well
This combination means that even if the fate of the asset purchase programme is practically sealed (we expect the announcement of such a decision at the September Fed meeting at the earliest), the monetary authorities will continue to dampen expectations for an imminent interest rate hike for a long time. As a result, the dollar appears to be close to exhausting its potential for appreciation. The US currency should be close to its maximum strength, and we expect it to lose value in the coming months.