Summary
Looking back at last week, in terms of the US dollar, despite the non-farm payroll employment number for August meeting expectations, the unemployment rate remained low, leading to market divergence on the magnitude of the next interest rate cut. As a result, the US dollar ended its rebound and once again declined. In terms of non-dollar currencies, the decline of the US dollar drove the euro and the pound slightly higher, while the yen experienced a significant increase driven by the sustained bullish economic data. Looking ahead to this week, the US CPI data is set to be released, with expectations of significantly impacting the market's anticipation of the Federal Reserve's future interest rate cuts. The European Central Bank will announce its interest rate decision, and officials will speak after the meeting, providing important guidance for the market in terms of the European economic outlook.
Global Forex Review and Fundamental Summary
The employment numbers falling short of expectations but the unemployment rate performing well has caused market divergence regarding the magnitude of the next interest rate cut at the next meeting.
The US Bureau of Labor Statistics released data last Friday showing an increase of 0.142 million non-farm payroll employment in August; June and July non-farm payroll employment was cumulatively revised downwards by 0.086 million people; the unemployment rate in August dropped to 4.2%. The downward revisions of the June and July data indicate a significant weakening of the US labor market, but the economic data for August, particularly the performance of the unemployment rate, has eased this concern. Based on the latest non-farm data, there is a significant divergence in expectations regarding whether the Fed will cut interest rates by 25 or 50 basis points, which has also exacerbated the current volatility of the US dollar index.
Economic data driving expectations of a rate hike in Japan has propelled the yen higher, continuing its strong performance over the week.
The yen remained strong against the US dollar last week, continuing its sharp upward trend. The latest publicly announced data showed a 3.6% year-on-year increase in cash earnings for Japanese labor in July, higher than the market's expected 3.1%. Similarly, other recent data, including the PMI, also supports the current widespread expectation in the market that the Bank of Japan may hike interest rates again by the end of 2024. If the current situation in terms of data and economic events continues, it is expected that the yen will continue to be sought after by investment and safe-haven funds in the short term, maintaining its strength.
The RBA governor's public statement hints at no imminent rate cuts, resulting in a lackluster market reaction and a modest decline in the Australian dollar from its previous high.
In a recent speech in Sydney, Australia's Reserve Bank Chairman Brock stated that the Monetary Policy Committee remains vigilant to the upward risks of inflation and that monetary policy will need to maintain "sufficient restrictiveness" until the CPI sustainably progresses towards the 2%-3% target. If inflation remains indefinitely above the target level, the central bank will strive to maintain a low unemployment rate, and interest rate easing will continue for a while. However, despite the expectation of unchanged interest rates, the Australian dollar continued to fall back from its previous high, dropping 2% last week.
Analysis of forex futures and options trends
2.1 Important forex futures contract trends (chart)
2.2 Analysis of futures market positions
According to the Futures Market Position Report published by the Commodity Futures Trading Commission on 2024-09-03, the total position of various currencies last week is as follows: The net short position of the Euro changed by 751 contracts, the net short position of the Australian dollar changed by 3702 contracts, the net long position of the British pound changed by 1866 contracts, the net short position of the Japanese yen changed by 186 contracts, the net short position of the Canadian dollar changed by 3182 contracts, the net short position of the New Zealand dollar changed by 1737 contracts. There were no currency conversions between long and short positions last week. In addition, currencies with one-way total position changes exceeding 20% are: Australian dollar, Canadian dollar, New Zealand dollar.
2.3 Outlook for key currency pairs
Whether the USDCAD will reverse its previous gains in the mid-term if the Canadian dollar cuts interest rates by 25 basis points, as expected, is of interest.
Last Wednesday, as markets expected, the Bank of Canada cut interest rates by 25 basis points, marking the third rate cut since June and July of this year. During the press conference, the central bank governor emphasized concerns about the economy being too soft, and stated that if inflation remains persistently low, it is reasonable to expect further rate cuts. According to the Bank of Canada's previously released long-term expectations, the country's inflation will drop to the 2% policy target in the second half of 2025. As inflation approaches the target as expected, the latest statements indicate that the central bank will not relax its vigilance and prematurely end its rate-cutting pace.
While the Bank of Canada announced its third interest rate cut, Canadian Prime Minister Trudeau stated that although there is still a lot of work to be done in improving the cost of living, the three consecutive rate cuts are a strong signal that the country is moving in the right direction. This is reassuring news for many people planning to buy a house. Canada is set to have a general election next autumn, and currently in the polls, Trudeau's leadership of the Liberal Party of Canada is far behind the Conservative Party. If Trudeau fails to reverse this trend in the next year, his term as prime minister may come to an end, and the economic vitality brought by the interest rate cut is precisely the change that Trudeau has been seeking.
From a technical analysis perspective, after a substantial 2.25% drop in the exchange rate in August, the current exchange rate of the US dollar against the Canadian dollar is located at the intersection of the previous support level and the weekly upward trendline. Last week, the exchange rate stabilized at this level and saw a small rebound. The Governor of the Bank of Canada has explicitly stated that if the economic data meets expectations, especially considering that the US dollar has also entered a rate-cutting cycle, there are more variables to consider whether the exchange rate can stabilize. If the US dollar falls against the Canadian dollar, it may likely give back all the gains since the end of 2023, and even end the previous upward trend, opening up a larger downside space.
2.4, Case study of RMB hedging
(In this section, we will present a series of cases as a risk management method to prevent foreign exchange against the RMB exchange rate volatility.)
Options combination for foreign exchange forward hedging: A domestic company needs to make a payment of 1 million Australian dollars for imports in one month. In order to hedge the risk of the Australian dollar appreciating, the client purchases European real call options contracts, with a term of one month, on 1 million Australian dollars against the Chinese yuan through CME, with a strike price of 4.74; at the same time, the client sells an out-of-the-money European call option contract on a currency pair with the same term and principal, with an execution price of 4.8.
After the maturity, if the spot exchange rate in the market is 4.73, neither of the two options will be exercised, and the client can purchase foreign exchange to pay for the goods at the spot price. If the market rate is between the two execution prices, such as 4.76, the client's purchased call options will be exercised, and foreign exchange will be purchased at the price of 4.74. If the spot price is higher than 4.8, both option contracts will be exercised, and the client will purchase foreign exchange at 4.74; the buyer of the option contract with an execution price of 4.8 will also exercise it, and the client will need to purchase foreign exchange at the market rate to cover this part of the exercise, ultimately minimizing the impact of the exchange rate fluctuation between 4.74 and 4.8.
