What Happened

• A return to economic anxiety worldwide has boosted the buck by 2.5% in August.
• Mexican Peso was an exception rising by over 1.0%, marking its first advance in three months.
• The Euro faced a dramatic drop that sank it to its weakest levels since 2002.
• China’s struggles with “Zero-COVID” policies caused a slowdown reverberating across the globe.
• Central bankers promised to fight inflation and warned of more downward pressure to come.

GreenShootsFX’s View

• The U.S. and China are entering new territory as Taiwan gets support from American officials.
• Europe’s tough times remain in focus as the European Central Bank looks to ease the pain of the energy crisis.
• Sterling may have room to fall if the new Prime Minister fails to impress with new agenda.
• Data-dependent Fed decisions will mean more sensitive markets when indicators are released.

In Focus

• Economic shocks in the past few years are characterized by a stronger dollar.
• Much like when COVID arrived, the economic nervousness of today has been marked by USD dominance.
• Resources are not moving around the way we were used to, and American geographic isolation protects it from much global harm.
• The interconnectedness needed for globalization to function keeps taking hits.
• Many currencies have reached record lows. Is a significant reversal in our sights yet?

In Depth

Scarcity of resources only helping the Buck and the Russian ruble while as the war goes on a struggle for energy is exhausting European leadership. We warned on the last Outlook how August could prove to be a downer for Euro value, like the month had historically been in over the last fifteen years. Well, make that 11 times out of the previous 16 years that August resulted in some depreciation for the shared currency. At the end of it all, the Euro sank to its weakest levels since the early 2000s when it was being introduced as multinational tender.

After decades of outsourcing their energy production, countries such as Germany and France are discussing the need to ration its use. A major heatwave this summer tested European patience with climate change, but winter will test their willingness to cooperate with reduced supplies of heat. Thus far, Russia is not changing course on the war and seems satisfied with the current cash flow of RUB (Rubles) from those buying its raw materials.

Overall, the invasion of Ukraine has dramatically challenged the stability of the European Union by cutting off one of its main lifelines when it comes to energy. We had discussed the return to coal mining in places like Denmark, and now there is even talk about the revival of nuclear energy plants.

However, the exorbitant costs of construction materials have been cited as one of the many obstacles to bringing back the power of the atom to people’s homes.

In Germany, power prices smashed records as an energy panic has engulfed the EU. There are also energy levies on energy storage, which have exacerbated the crisis. There will need to be a major push for continental investment and the actual application of alternative energy sources such as wind power. Studies of rising temperatures predict that exceedingly hot summer times will be the new normal by 2035.

Nevertheless, we see the possibility for some Euro reversal of losses if the European Central Bank decides to raise interest rates by another 75 basis points at their September 8th meeting. Additionally, we will look out for recognition by the ECB of Italy’s improved situation and European gas storage levels refilled to be in line with November targets.

Despite the government coalition collapse, Italy’s economy grew by 1.0%, according to Gross Domestic Product figures from July. The Euro-zone’s third largest economy marked six straight quarters of advancement, although its Consumer Price Index came in at 8.4%, worrying that it may hurt future GDP.

Prime Minister Mario Draghi had to send his letter of resignation twice as the President, Sergio Mattarella, refused his initial attempt to quit. As one last piece of legislative success to aid the nation, Draghi managed to pass a package to stimulate the economy with an injection of €17.0 BN. As he left, Draghi said goodbye in his speech by explaining that even central bankers have a heart.

In the U.S., there were mixed economic feelings throughout August. The S&P 500 experienced a rally for four straight weeks up until the middle of the month. Earlier, July U.S. Consumer Sentiment reached the highest level registered in three months. Non-Farm Payroll figures also pointed at a healthy labor sector, coming in at 528K jobs vs. 250K forecast.

It was, in fact, this progress that served as evidence for the Fed to feel confident that the economy is strong enough to withstand the higher borrowing costs emanating from hiking interest rates. When the Fed Minutes from the July meeting came out, some economists interpreted comments by officials as suggestive of slowing down the pace of interest-rate increases.

This analysis has already been deemed wrong after officials interviewed explained that it was June’s CPI with lower-than-expected numbers that forced some discussion about how the Fed could run into the chance of hiking too aggressively.

More importantly, Fed officials have expressed a total commitment to stay on the Fed’s planned course of hike action, pointing at how they must cool down the economy further. At the Jackson Hole Symposium in Wyoming, Fed Chairman Jerome Powell doubled down on his hawkishness and said that “the historical record cautions strongly against prematurely loosening policy.”

This means the Fed will allow data points such as the Empire Manufacturing Survey to provide some of the worst readings since 2001, when a different shock affected the business mood.

Meanwhile, China is no longer acting like the engine of economic growth has been for the globe in the last 30 years. After years of going hard with Total Social Financing, the country is less willing to use debt-driven aid to spur the economy.

It is now in tense relations with the U.S. over visits to Taiwan by multiple U.S. officials that followed in Senator Nancy Pelosi’s footsteps. Taiwan may help the U.S. by providing more semiconductor and chip technology. Different times mean different arrangements, so how long will USD dominate?