News of Chinese banks lowering their lending prime rates to assist the mortgage sector arrived early in the European morning. The announcement serves as a reminder that the Chinese economy is slowing (USD/CNH is currently trading above 6.84), just as the PBOC policy rate drop did at this time last week. Due to these challenges, the dollar is still in demand; on a quiet Friday, we unexpectedly witnessed DXY rise above 108. The somewhat encouraging US data this week should be the main focus this week, leading up to Powell's address on the US economic outlook on Friday. The Fed is likely content with what the market anticipates for its policy rate this year (around 125bp of increases to a target range of 3.50–3.75%). With European and Chinese data remaining soft this week - and no end in sight for the surge in gas prices - expect the dollar to hold its gains.
This week's economic schedule in Canada is light. Over the previous three sessions, the US dollar increased by more than 1% vs the Canadian dollar. Today, it increased a little but stopped short of CAD1.3035. Initial support is located close to CAD1.2975-80. With sharp opening losses expected for US equities, it may discourage buying of the Canadian dollar in the early North American activity. Observe the USD/CAD chart.
The EUR/USD is quite volatile and could at any point fall below parity. The changes Asian central banks made to their portfolios may have contributed to the sell-off. The persistent pressure on Asian FX will lead to intervention to sell dollars and strengthen local currencies. Asian FX reserve managers will then need to sell EUR/USD to re-balance FX portfolios to benchmark weightings. We also contemplate whether this week may bring about a more hawkish ECB. For the meeting on September 8th, the market anticipates a 54 bp rate increase. If the ECB wants to support the EUR/USD, could it begin to raise the possibility of more drastic rate increases? The EUR/USD looks to be skewed toward testing the 0.9950 low from July this week.
The strong dollar is causing issues for all FX, and this week, the pound may touch its July low of 1.1760 again. After that, a drop to 1.15, a level witnessed in the March 2020 flash crash, is not difficult to rule out. The pound appears to be in danger, and this week's UK schedule is rather calm.
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