EUR (0.998) ▬

▪ For the first time since December 2002, the EUR broke below parity on August 23 as the USD index soared to a 20-year high due to the global risk-off environment, Fed's persistent hawkishness, and China's dismal economic report. On top of that, the shared currency was also pressured by growing recession fears amid Europe's weak macroeconomic readings and ongoing geopolitical uncertainty.

▪ Despite Europe's worsening energy crisis and fears of a looming recession, the bloc's currency is expected to fluctuate between gains and losses and stabilise near parity against the USD due to the expectation that the European Central Bank may deliver a 75 basis-point interest rate hike in September. On top of that, the European Union’s potential intervention to dampen surging energy prices may also help to buoy the EUR.

GBP (1.161) ▼

▪ GBP depreciated against the USD in August, reaching its weakest level in over two years. The sterling was pressured by growing recession fears, with the Bank of England (BoE) projecting the UK to fall into a recession by year-end. Additionally, the dollar strengthened significantly amid the return of risk-aversion and the Fed’s reiteration of hawkish monetary policy.

▪ GBP may continue to weaken in September, as odds of a large rate hike by the BoE have eased following heightened recession expectations, whilst the Fed seems increasingly likely to maintain its aggressive tightening momentum. Nonetheless, the conclusion of the UK Prime Minister election on Sep 5 may provide some support for cable.

AUD (0.685) ▼

▪ AUD depreciated against the USD in August despite a period of strength early in the month following the Reserve Bank of Australia’s (RBA) fourth consecutive rate hike. The aussie dollar weakened following renewed expectations of a hawkish Fed, as well as Australia’s weaker than expected jobs and PMI reports.

▪ AUD is expected to continue weakening in September, amid plummeting commodity prices and a hawkish US Fed, which will likely raise interest rates by another 75 or 50 bps. However, this weakness may be lessened should the RBA also hike the interest rate by another 50 bps this month.

NZD (0.612) ▼

▪ NZD depreciated against the USD in August following weak New Zealand retail sales in 2Q22, raising the risk that the country will slip into technical recession despite tight labour market conditions. The bearish trend was also associated with China's weak economic data and hawkish US Fed but partially mitigated by earlier Royal Bank of New Zealand rate hikes.

▪ The near-term outlook for the kiwi remains bleak as the US Fed is expected to deliver further rate hikes in September, while risk aversion lingers due to global recession fears.

Source: Kenanga Research - 1 Sept 2022