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Bannockburn Global Forex Drivers for the Month Ahead October 2, 2022 View Online Economic Calendar Oct 2: Brazilian General Elections Oct 3: Central Bank of Israel Oct 3: Reserve Bank of Australia Oct 3: Quebec, Canada Provincial Election Oct 4: Reserve Bank of New Zealand Oct 5: National Bank of Poland Oct 5: OPEC+ Meeting Oct 6-7: Heads of State Informal Meeting - EU Oct 7: US & Canadian Employment Data Oct 7: Mexico September CPI Oct 9: Austrian Presidential Election Oct 9: German State Election -Lower Saxony Oct 10: Canadian Thanksgiving (Markets Closed) Oct 10: Columbus Day (US Bond Market Closed) Oct 11: UK Employment Data Oct 12: Bank of Korea Oct 13: US September CPI Oct 14: Preliminary University of Michigan Survey Oct 15: China Medium Term Lending Facility Rate Oct 16: China’s National People’s Congress Convenes Oct 19: UK and Canada September CPI Oct 20: China 1 & 5 YR Loan Prime Rate Oct 20-21: Heads of State Summit - EU Oct 24: Preliminary October PMI Oct 26: Bank of Canada Oct 26-28: International Atomic Energy Agency Summit Oct 27: European Central Bank Oct 27: Japan October CPI Oct 30: China October PMI; Brazilian Presidential Runoff Elections (if necessary) Oct 31: Eurozone Flash CPI October 2022 FX Outlook The dollar's bull run was extended in September. The main focus was Fed policy's aggressiveness, which looks set to continue. The Fed's guidance, which the market accepts, is that it most likely will lift the Fed funds target rate another 125 bp in Q4. Officials have become more candid that tightening financial conditions will cause more pain, which probably means higher unemployment and weaker asset prices. The argument is the more significant risk is that inflation expectations become entrenched, requiring stronger and more painful action later. The pain minimization argument applies to the international community as well. The world is sensitive to US monetary cycle, but it also makes a handy target to explain poor management, decision-making, or more general challenges. The main challenge for many countries is the surge in energy and food prices. The dollar's appreciation exacerbates those forces. If the Fed had to be even more aggressive and drive the US economy into an early 1980s Volcker-like recession, that would be a worse outcome. The US is the largest economy, and its rivals have been hobbled, partly, if not mostly, by their own hand. Russia's invasion of Ukraine is turning into a blunder of historic proportions and has undermined China's efforts to develop key economic and financial ties to Europe. The response to Putin is partly a stronger NATO, but also it is further encouraging the arms race in the Asia Pacific. The popping of China's property bubble and the zero-Covid policy has sapped the world's second-largest economy. Europe is on the verge of a recession. Inflation does not appear to have peaked, and the European Central Bank is earlier in its adjustment. Volatility is risk, and volatility in the foreign exchange market, like other parts of the capital markets, is elevated. There have been several shocks in September that helped generate the volatility. As is its wont, the market seemed to exaggerate and overshoot. We look for a quieter October and one that is conducive to a corrective / consolidative phase for the dollar. Click here for the full monthly outlook Bannockburn's World Currency Index, a GDP-weighted basket of the currencies representing the 12 largest economies, fell slightly more than 2% in September as all but the Russian rouble and Mexican peso fell against the dollar. The BWCI took out the 2020 low. With a strong dollar, tighter Fed policy, and economic weakness in China, one may have expected emerging market currencies to have fared worse than the G10. Yet that is not what is happening. In September, the major currencies in the index fell by an average of 4.4% (excluding the dollar), and the emerging market currencies in the index fell by about 2.5%.
The dollar's bull run was extended in September. The main focus was Fed policy's aggressiveness, which looks set to continue. The Fed's guidance, which the market accepts, is that it most likely will lift the Fed funds target rate another 125 bp in Q4. Officials have become more candid that tightening financial conditions will cause more pain, which probably means higher unemployment and weaker asset prices. The argument is the more significant risk is that inflation expectations become entrenched, requiring stronger and more painful action later. The pain minimization argument applies to the international community as well. The world is sensitive to US monetary cycle, but it also makes a handy target to explain poor management, decision-making, or more general challenges. The main challenge for many countries is the surge in energy and food prices. The dollar's appreciation exacerbates those forces. If the Fed had to be even more aggressive and drive the US economy into an early 1980s Volcker-like recession, that would be a worse outcome. The US is the largest economy, and its rivals have been hobbled, partly, if not mostly, by their own hand. Russia's invasion of Ukraine is turning into a blunder of historic proportions and has undermined China's efforts to develop key economic and financial ties to Europe. The response to Putin is partly a stronger NATO, but also it is further encouraging the arms race in the Asia Pacific. The popping of China's property bubble and the zero-Covid policy has sapped the world's second-largest economy. Europe is on the verge of a recession. Inflation does not appear to have peaked, and the European Central Bank is earlier in its adjustment. Volatility is risk, and volatility in the foreign exchange market, like other parts of the capital markets, is elevated. There have been several shocks in September that helped generate the volatility. As is its wont, the market seemed to exaggerate and overshoot. We look for a quieter October and one that is conducive to a corrective / consolidative phase for the dollar.