Tuesday commemorates the 52nd year since the Bretton Woods monetary system’s conclusion, which linked the dollar’s value to gold and other currencies to the dollar. A few economists have attempted to present their perspectives using the concept of Bretton Woods II, and there have even been advocates for Bretton Woods III.
However, these are informal agreements with minimal or no reciprocity and mutual responsibilities. The essence of the issue is that the conclusion of Bretton Woods introduced the contemporary period of fluctuating currencies, which in reality, has resulted in unpredictable exchange rates.
One of the significant overarching concepts in international relations is the theory of hegemonic stability. It perceives capitalism as functioning optimally when a singular nation is capable of establishing and upholding global interaction regulations. The efforts to revive Bretton Woods fail to understand Ian Bremmer’s “G-Zero” notion.
Bretton Woods was made feasible by the unmanageable imbalance of authority that prevailed in 1944. The lack of balance in power has been absent for many years, and even after the Soviet Union fell, the United States shifted its ideology away from fixed exchange rates and embraced the principles of market fundamentalism.
Allowing markets to determine the exchange rates has led to the present low double-digit actual (historical) three-month instability of the Antipodean currencies and Scandis. The fluctuation of the remaining G10 currencies ranges from approximately 6% (Canadian dollar) to 9% (Japanese yen).
The unpredictability necessitates companies and stakeholders to consider currency fluctuations and handle the uncertainty. Explanations for brief-term changes highlight economic information, unexpected events, and technical elements. In the upcoming week, there are several clusters of data points. The United States, for instance, discloses July retail sales and the same is true for China, the United Kingdom, and Mexico.
The United States, China, and the euro area disclose their most recent data on manufacturing output. Japan, the United Kingdom, and Canada disclose July Consumer Price Index (CPI), while the United Kingdom and Australia furnish fresh labor market data. From a technical standpoint, the dollar has demonstrated more excellent durability than initially anticipated.
We had predicted that the recovery since mid-July would conclude approximately at the moment of the US Consumer Price Index (CPI) report. Momentum indicators are extended, and a few have started declining for the dollar, but the price movement itself has not yet validated our suspicions.
USA
Following a period of contraction in the first and second quarters of 2022, the economy of the United States has been growing at a rate that exceeds the non-inflationary pace of 1.8%, as determined by the Federal Reserve over the past four quarters. The GDP tracker from the Atlanta Federal Reserve predicts that the economy will pick up speed in the third quarter, surpassing the speed limit by more than double.
The three reports that showcase the upcoming week are anticipated to exhibit gradual improvement starting in June. The middle prediction in Bloomberg’s survey is for retail sales to have increased by 0.4% following a 0.2% rise in June. Nevertheless, the fundamental cluster that specific GDP models employ, which omits automobiles, fuel, construction supplies, and food provision, might decelerate from 0.6% in June to 0.4%. Housing initiations in June plummeted by 8% and probably steadied in July.
Licenses are also probable to have stabilized after declining 3.7% in June.
Finally, industrial production declined by 0.5% in June and probably recovered most in July. The notion in the market is that the economy will decelerate from 2.4% in Q2 to 0.6% in Q3, based partially on a reduction of the expansion of consumption (1.6% in Q2 and expected to be 0.8% in Q3) and a significant decline in private investment (from 5.7% in Q2 to -1.1% in Q3). The reports this week have a direct influence on the evaluation of both.
Simultaneously, the possibility of a gentle landing does not appear to be questioned shortly, maintaining the likelihood of a minimal increase in interest rates in September.
The Dollar Index is at the higher part of its recent range. It ended higher than 102.75, a significant region from a technical perspective. It represents both the (38.2%) retracement goal of the declines since the peak of the year was documented in early March (~105.90) and the (61.8%) retracement of the falls since the high of May 31 (~104.70).
The general horizontal movement thus far in August has enabled the Dollar Index to surpass the line that connects the peaks of May, July, and early August (begins the new week near 102.45 and concludes the week around 102.25).
The Moving Average Convergence Divergence (MACD) is continuing to show an upward trend, while the Slow Stochastic indicator has reached a plateau but has not yet started to decline. The upcoming technical zone is 103.00 and 103.40-60, where you can find the 200-day moving average and the highest point of the previous month. A pause ranging from 101.60 to 75 would assist in validating a peak.
China
Beijing has implemented additional actions this year to render its economic information less obtainable. The market has always doubted the accuracy of Chinese economic data and reports, especially when it is intentionally unclear. About the feeling of Kabuki theatre, there were accounts in the Financial Times stating that: “Numerous regional brokerage analysts and researchers at prominent universities as well as government-funded think tanks revealed that they had been directed by regulators, their employers, and even domestic media organizations to refrain from expressing pessimistic views on various subjects, including concerns about capital flight and declining prices.”
China releases data on industrial production, retail trade, real estate investment, real estate transactions, and the unemployment rate as surveyed. To a great degree, despite the data having increased trustworthiness, it has been made irrelevant by the Politburo’s acknowledgment of the necessity for additional economic assistance.
There might be two key points. The existing measures need to be improved, and the real estate market needs to be fixed. Furthermore, as a demonstration of validation-by-opposition, through intensifying suppression, authorities acknowledge the dissatisfaction.
The People’s Bank of China (PBOC) will raise the funds available at the one-year medium-term lending facility while maintaining the interest rate at 2.65%. The unfortunate July lending statistics contributed to the negativity and resulted in the CSI 300 falling by 2.3% before the weekend, marking the most significant decline since last October. A reduction in reserve requirements still appears to be a possibility, although the timing remains uncertain.
The strength of the dollar and the harmful Chinese data (low prices, declining exports, and poor lending) continue to stress the yuan.
The dollar increased to nearly CNY7.24 last week, and the 0.9% growth was the biggest thus far in the third quarter. The fixings from the PBOC continue to assist in tempering the ascent of the dollar. The high point reached last month was around CNY7.2550, while the highest end of the year, which occurred in late June, was around CNY7.2690.
In November 2022, the US dollar surged to nearly CNY7.3275. Chinese authorities have the potential to enhance their performance, but their actions are primarily motivated by the dollar rather than the yuan. Given the presence of deflationary pressures, there is not much immediate need to reverse the course of the yuan.
Great Britain
Market anticipations for the September Bank of England gathering were reduced following the less robust than projected June Consumer Price Index. In the upcoming days, the United Kingdom will release the July Consumer Price Index (CPI), employment and salary information, and retail transactions.
During the period spanning from June to October of the previous year, the Consumer Price Index (CPI) in the United Kingdom experienced a significant increase, reaching an annualized growth rate of approximately 10%. As the substantial monthly prints are substituted with lesser increments, the year-over-year rate reached its highest point at 11.1% last October. It remained at 10.1% as recently as March and is expected to decrease persistently.
The Bank of England predicted a 5% rate by the year’s conclusion. It stood at 7.9% in June. The tightness in the labor market and the increase in average weekly earnings (6.9% in May, compared to the same period last year), which is at its highest point in the current economic cycle, will be closely monitored.
Having mentioned that, real wages in the United States have been increasing, while in the United Kingdom, weekly earnings are growing at a rate lower than the inflation rate. This clarifies why domestic expenditure increased by a paltry 0.2% in the first quarter and remained stagnant in the second quarter. Nevertheless, the mean weekly wages have increased for the fourth successive month in June.
Individually, the number of employees receiving wages may have decreased for the second month. Retail sales (UK data in terms of quantity) is a more specific gauge compared to household consumption. The July retail sales will also be available in the upcoming week. The mean monthly rise in Q2 was 0.4%, the highest in a quarter for two years. Based on the remarks made by BOE officials, we believe that the job figures and consumer price index will take precedence over retail sales.
Sterling peaked last week at around $1.2820 following the US CPI but turned around and closed below the prior day’s low in an outside down day on August 10. Despite the Q2 GDP being more robust than anticipated, it failed to provide significant assistance to the value of the British pound. The $1.2825-50 region is of utmost importance as a resistance level, and achieving a close above it is imperative for enhancing the technical outlook of the British pound.
However, a breach of $1.2600 could be a foreboding technical occurrence. I have mentioned that the Moving Average Convergence Divergence (MACD) is currently exhibiting a downward trend and is being excessively sold. The Sluggish Stochastic has increased but appears delicate. The decline of Sterling over four weeks is the lengthiest period of consecutive losses since May 2022.
Euro area
The upcoming set of eurozone information will have minimal impact on the market, and the factors that influence the expectations for the next European Central Bank (ECB) meeting in the following month will not be discovered in the June data. These factors include trade, industrial, and construction production, a reevaluation of the second quarter gross domestic product (GDP), and quarterly employment statistics.
Germany observes the August ZEW investor survey, but although it is more up-to-date, it is unlikely to have a significant impact. The evaluation of the present circumstances needs to be revised. It has been unfavorable since the end of 2021. The mean this year is -47.6, nearly two times as adverse as the period from the previous year. The anticipations element was unfavorable starting from March 2022 but was able to bounce back in January-April of this year, yet has declined again below zero in the previous three months.
The commotion caused by Italy’s proposal to swiftly impose a tax on banks has subsided without significantly affecting its premium over Germany. The 10-year difference displayed minimal response and stayed considerably lower than the previous month’s peak of approximately 175 basis points.
It is floating close to the 20-day moving average, slightly under 165 basis points. The premium of Italy’s two-year bond displayed a more significant response, but it reached its highest point at around 70 basis points, just slightly lower than the peaks observed in June and July. It concluded the previous week at approximately 65 basis points.
The euro surged to $1.1065 following the US CPI and surpassed the 20-day moving average for the initial time in a fortnight but promptly reversed. It was exchanged at a value lower than $1.0945 before the weekend. The cost movement was unsatisfactory, and the euro declined for the fourth uninterrupted week, corresponding to the lengthiest decline since March 2022.
The Sluggish Stochastic has increased, and the MACD has stabilized. The uneven merging price movement is irritating, but still leaning towards perceiving this as a foundation shaping after retracting from the year’s peak in mid-July at around $1.1275. Having mentioned that, a breach of the lowest point reached this month (approximately $1.0910) might indicate a decline toward $1.08.