September 27, 2023

Foreign Exchange Commentary

Mid-day Remarks

Noteworthy

  • U.S. Dollar Climbs for Sixth Day, Sets Fresh Year-to-Date High  The U.S. Dollar

One year ago today, the British pound appeared headed for the once unthinkable: parity with the U.S. dollar.

Sterling dropped to $1.0350—its lowest level ever—in the early hours of September 26, as Asian financial hubs kicked off trading.  Investors feared the currency could breach a 1-1 exchange rate with the dollar.  

That didn’t end up happening.  The pound stabilized throughout the day as European and U.S. trading came online.

Nevertheless, the episode became a symbol of Britain's economic and political malaise. It also showcased the risks looming in the global financial system after the era of ultra-low interest rates that had enabled governments, companies, and households to borrow aggressively.

The pound's rout kicked off a few days earlier, on Sept. 23, 2022, when a new U.K. government headed by Liz Truss unveiled plans for a huge program of subsidies and tax cuts, paid for by borrowing, to revive the economy.

Market backlash was fast and fierce, with investors alarmed by the potential impact on inflation and interest rates, as well as the sustainability of U.K. finances.

Long-term government bonds tumbled alongside the pound, ensnaring a little-known hedging strategy used by pensions.  The Bank of England stepped in to rescue the bond market.

Truss resigned after 45 days in office, becoming the shortest-ever serving U.K. prime minister.

One year on, the pound is trading above $1.21 but is under pressure.  After surging 5% in the first half of this year—the best performance of any major, developed currency against the U.S. dollar—it is once again lagging.

Weak growth prospects, the long-term effects of Brexit, ongoing questions over debt sustainability and a stubborn inflation problem have all made investors wary of holding U.K. assets.

Consumer-price index

Bank of America analysts recently cut their sterling forecast, now expecting to see the currency at $1.18 by year-end, compared with an earlier prediction of $1.24.

The pound may not be back on the road to parity, but its best days are likely behind it for the foreseeable future.

This is not a complete analysis of every material fact regarding any company, industry or security. The information and materials herein have been obtained from sources we consider to be reliable, but Comerica Capital Markets does not warrant, or guarantee, its completeness or accuracy. Materials prepared by Comerica Capital Markets personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Comerica Capital Markets, including investment banking personnel.

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Summary

  • Canadian dollar stronger and highly reflective of crude oil price moves.
  • 10-Year Treasury yield spikes up 4.53%, supporting dollar strength. 
  • U.S. September consumer confidence 103.0; estimate 105.5.
  • Euro currency is most oversold in a year, nine-day RSI shows.
  • Swiss franc eyes longest losing streak since 1975.
  • U.K. pound sterling falls to fresh six-month low against the U.S. dollar. 
  • Japan’s Suzuki says watching FX with strong sense of urgency.
  • U.S. preliminary durable goods orders rise 0.2% month over month versus +0.5% forecast. 
  • Swedish Krona erases gains versus euro and dollar. 
  • Australian and New Zealand dollar’s falls amid China property woes. 
  • China’s yuan supported by PBOC fixing, verbal support.
  • Brazil’s real extends decline, breaches 5.00/USD level. 

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