Dollar Index Rallies on Hawkish Fed Tone and Strong US Economic Data (21 - 25 October)

Gold and silver rose amid geopolitical tensions, while the Dollar Index gained from strong U.S. data. Chinese stimulus boosted silver, and global currencies weakened, but stock indices climbed on positive earnings.

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Gold and Silver

Metals performed strongly this week, with gold testing new highs and silver closing the week up approximately 1.5%. Despite a strengthening dollar index, U.S. Treasury bonds ended the week on a negative note, benefiting non-yielding assets. Additionally, rising tensions between China and Taiwan in Asia, as well as between Israel and Hamas in the Middle East, positively impacted safe-haven metals. Although news from China began poorly, the announcement of a new stimulus package, better unemployment figures, and growth data that aligned with expectations helped boost silver. In recent weeks, silver has been pressured by weak data from China, its largest importer, but the positive news flow toward the end of the week allowed it to retest a critical resistance level.

The Dollar Index

This week, there were speeches by Fed governors and the release of key economic data in the U.S. In their speeches, the governors generally adopted a more hawkish tone. Waller indicated that the Fed should be cautious when deciding on further rate cuts given the current economic conditions. Additionally, Bostic mentioned that he is planning more 25 basis point rate cuts this year, in contrast to the market expectation of a 50 basis point cut. Alongside these speeches, the key economic data released this week showed that the labor market remains resilient and that retail sales grew more than expected. Furthermore, one of the three reasons the DXY ended the week on a positive note is that election surveys indicated an increasing possibility of Trump's victory. Trump's inflationary policies are expected to prevent the Fed from cutting rates as quickly as anticipated.

Forex Market

 A volatile week in China has come to an end. Import and export data fell short of expectations, the Consumer Price Index (CPI) recorded its lowest figures since June, and the Producer Price Index (PPI) continued its deflationary trend for the 24th consecutive month, indicating persistent weak domestic demand. Later in the week, the People's Bank of China (PBoC) revealed a new stimulus program as part of a broader package. The PBoC has initiated a specialized re-lending facility for listed companies and major shareholders to buy back shares, aiming to support economic recovery. The program allocates CNY 300 billion in funding to 21 eligible commercial banks, which can lend to qualified companies and shareholders, according to a statement from the central bank. Lenders will independently decide whether to issue the loans and will bear the associated risks, while the central bank will provide funds equivalent to the principal of the loans to these commercial lenders. In a separate announcement, the PBoC stated that about 20 institutions, including securities firms and investment funds, have been approved to use a swap facility from the central bank, allowing them to access liquidity by pledging bonds and certain stocks as collateral. Additionally, the GDP data released on Friday was viewed positively, despite falling short of the 5% target, due to more complex external conditions and a better-than-expected unemployment rate. Although the yuan gained value on Friday with these developments, this increase could not offset the weekly decline.

A flat-negative week has concluded for the Australian dollar. The currency was negatively impacted by the softening prices of oil and copper, as well as the weakness of the yuan. Meanwhile, robust unemployment data and hawkish remarks from the Reserve Bank of Australia's (RBA) meeting minutes, warning that the fight against inflation is not yet over, have supported parity. With these two developments balancing each other, the AUD/USD pair closed the week nearly flat.

Last week, the CPI data came in at 1.6%, marking the lowest reading since 2021 and falling below the Bank of Canada's (BoC) inflation target of 2%. With the BoC set to announce its interest rate decision next week, a 50 basis point cut is anticipated. This expectation is supported by Macklem's previous comments indicating the possibility of larger rate cuts if inflation decreases more rapidly than expected. As a result of both the anticipated rate cut and a strong dollar, USD/CAD ended the week higher, causing the Canadian dollar to depreciate by approximately 0.5%.

The NZD/USD has ended the week with depreciation due to both internal and external developments. Internally, the RBNZ is expected to cut interest rates by 50 basis points in November, with an 88% probability, due to CPI data reaching the central bank's target range of 1-3%, coming in at 2.2% on an annual basis, and escalating recession concerns. Externally, negative data and news flow from China, on which the New Zealand economy heavily depends, have caused the NZD/USD to test an 8-week low. As a result of these developments and a robust dollar, the NZD/USD, which closed the week on a negative note, has experienced three consecutive weeks of decline.

The euro has closed this week in the negative, marking its third consecutive week of depreciation. The main factors behind this decline were Thursday's inflation data, which came in below expectations, and the ECB's decision to implement a 25 basis point rate cut. Additionally, Lagarde's lack of clarity regarding future rate cuts, coupled with her statement that the European economy is on a soft landing path, drew attention.

The Japanese yen continued to depreciate this week, once again testing the 150 level against the dollar. Weaker import and export figures, coupled with inflation data that, while above expectations, still showed a decline, contributed to this drop in value. Additionally, Adachi's remarks about the need for the central bank to proceed cautiously due to global economic developments and wage increases in Japan further fueled the yen's decline. Moreover, the yen's weakness has led Japanese central bank officials to discuss potential intervention, emphasizing their desire to avoid excessive volatility in the exchange rate.

In the UK, inflation figures came in below expectations, significantly increasing the likelihood of an interest rate cut. Although retail sales data exceeded forecasts at the end of the week, the rising expectations for rate reductions led to a decline in the exchange rate, closing the week lower.

Stock Market

Last week was quite positive for indices, with the Dow Jones and S&P 500 reaching new highs, while the Nasdaq also managed to close the week in the green. Despite the Fed’s expected interest rate cut being reduced to 25 basis points, improving labor market data, the start of earnings season, and a new stimulus package from China were key drivers pushing the indices higher.

On Thursday, Blackstone stood out with earnings that exceeded expectations, leading to a 13% increase in its stock and contributing to the overall market rally. Additionally, Morgan Stanley reported earnings on Wednesday that also surpassed forecasts, resulting in approximately an 8% gain for its stock. Strong earnings from other major financial companies, such as Bank of America and Goldman Sachs, further supported the indices' positive performance.

The technology sector also contributed to the rise in indices. Apple closed the week up 2%, while Nvidia gained 3.8% and Google rose by 1.2%. Netflix, after reporting earnings on Thursday, saw a after-close surge of around 6%.

On the downside, Meta stood out among the stocks that closed lower, finishing the week down 1.8% and diverging from the tech sector and overall market trend, with its earnings report set for October 29. Tesla also experienced a significant decline, closing the week down 8%, with its earnings expected to be released after the market close on October 23.