The US dollar index edged higher on Thursday, reaching its highest level in 20 years, as the Federal Reserve raised interest rates for the third time in a row by 75 basis points and presented a hawkish view for rates. Fed policymakers forecasted that interest rates would peak at 4.6% next year, with no cuts until 2024, bucking market expectations that the central bank would loosen policy in 2023 to manage the economy. The dollar also benefited from safe-haven flows when Russian President Vladimir Putin announced a partial military mobilization, escalating the war in Ukraine significantly. Later in the day, the U.S. economic docket will feature current account and initial jobless claims data.
The Euro remained close to its worst level since 2002, as investors assess how the ECB will be able to control inflation without negatively impacting the economy. Investors scaled bets on larger ECB interest rate hikes after the U.S. Federal Reserve raised rates by 75 basis points for the third time in a row, widening the interest rate differential with the Eurozone. Since July, the ECB has hiked interest rates by a total of 125 basis points in a bid to reduce the record annual inflation rate of 9.1%. Despite recessionary threats, the central bank is now likely to raise interest rates by 50 to 75 basis points in October. Going forward, traders are looking forward to consumer confidence data of September from Eurozone that is expected at -25.8.
The British Pound is staging a modest recovery following Bank of England’s latest rate hike decision. In today’s meeting, the Bank of England raised its benchmark interest rate by 50 basis points to 2.25%, marking the seventh consecutive rate hike and raising borrowing costs to their highest level since 2008. The central bank also unanimously agreed to cut the stock of acquired UK government bonds financed by the issuance of central bank reserves by £80 billion over the following year. The British Pound rallied but stayed near its lowest level in 37 years. Despite the economy entering recession, policymakers indicated they would "act decisively, as required" to sustainably return inflation to the 2% target.
On Thursday, the Japanese government intervened to strengthen the Yen for the first time since 1998, as the currency extended losses to new 24-year lows following the Bank of Japan's decision to retain its dovish stance. The Yen rose immediately after the intervention, before which the currency was in a steep decline as the Bank of Japan maintained ultra-low interest rates at a time when central banks around the world were being hawkish. The Fed hiked rates by 75 basis points for the third time the day before, signaling that more rises are on the way. However, the governor of the Bank of Japan stated that interest rates would not be raised for some time. Still, the efficiency of intervention is debatable.
After losing 0.73% yesterday, the Canadian dollar is continuing its decline beyond August 2020 levels this morning. The move comes after the Fed raised rates by an expected 75 basis points and projected future rate hikes. Domestically, a lower-than-expected inflation figure reduced expectations of how rapidly the Bank of Canada will continue to raise interest rates. Canadian consumer prices grew 7% year on year in August, falling short of predictions of 7.3% and well below the 39-year high of 8.1% two months earlier. The statistic adds to the case for slower rate hikes after August job data disappointed, with the Canadian jobless rate jumping to 5.4% from 5% expected.
The Mexican Peso recovered slightly this morning after closing 0.11% lower on Wednesday, owing to the Fed's rate hike decision. Mexico's swap rates rose for the third consecutive day, with the TIIE curve pricing in nearly 165 basis points of rate hikes for the remainder of 2022, pushing policy rates beyond 10% by year's end. Meanwhile, three Banxico meetings are planned for September, November, and December of this year. The market sees nearly equal odds of a 75bp to a 100 bps rate hike this month and fully prices a 50bp increase in November. Later today, Banxico is poised to disclose its key indicator half-month inflation figure for September, which is predicted to rise 0.43% on a monthly basis.
The Yuan dropped to its lowest level since June 2020, pushed down by a strengthening dollar as the U.S. Federal Reserve enacted its third consecutive 75 basis point rate hike and presented a hawkish rate outlook to combat inflation. Meanwhile, the People's Bank of China kept its benchmark lending rates constant in September, citing a growing policy divergence between China and the U.S. as a danger of additional Yuan devaluation and capital outflows. A bleak internal picture dragged on China's currency, with Goldman Sachs drastically lowering its 2023 economic growth prediction for China, forecasting Beijing will maintain its rigorous zero-Covid plan well into next year.
Yesterday, the Brazilian real fell 0.46% against the U.S. dollar. The move comes after the Brazilian Central Bank held rates constant, while the Fed announced a 75 basis point boost yesterday. As expected, the Central Bank of Brazil opted to maintain the Selic rate at 13.75% on September 21st, 2022. Brazil's inflation rate fell further to 8.73% in August 2022, from 10.07% the previous month, the first time it has been out of double digits in a year. Inflation is expected to be 5.8% in 2022, 4.6% in 2023, and 2.8% in 2024, according to COPOM. Policymakers observed that the Brazilian economy remained resilient, with the most recent indications indicating expansion.