Daily Market Commentary 8th September 2022

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The currency markets appear to be following the equity markets into turmoil, with the GBP, EUR and Yen all hitting multi-year lows. The US Dollar, as a safety play, is experiencing rising rewards for holding the once mighty world reserve currency. The Federal Reserve is in a war against rampant inflation and are raising interest rates in chunks of 75 basis points. The Bank of Canada followed suit overnight, with a 75 basis point rise of it’s own, to 3.25%. The Bank cites rampant inflation, although recent easing, from falling oil prices, appear to be tempering the velocity of inflationary pressures. The energy crises deepens in Europe, as the Nord Stream 1 gas pipeline to Germany, has been switched off. Europe is heading into the winter months and cannot survive without gas. The EUR fell to 0.9880, before a small bounce, while the Yen has hit 24 year lows, approaching 145.00.

The era of low expectations has now reached even lower levels, with the rise of Liz Truss to the Prime Ministership of the UK. The soaring rhetoric promising solutions to the energy crises and the spiralling cost-of-living pressures, will soon meet a cold, hard reality. The GBP has not traded at these levels since 1985, heading towards 1.1400, reflecting the lack of confidence markets have in the latest political solution . Fiscal realities mean there is little room for further deficit bailouts, paid for by expanding the money supply, as inflation is the result. Inflation in the UK is raging higher than in most Western economies and predicted to go much higher. Modern Monetary theory is clearly failing. The Bank of England must get a grip on their balance sheet and Truss must act urgently to rebuild the countries energy grid.

Commodity currencies are suffering the surging reserve, with the NZD falling to 0.6000, while the AUD looks to test 0.6700. This comes despite some strong Australian GDP numbers, Q2 annualised growth of 3.6%, lead by mineral exports. The strong economic performance is not reflected in the currency, with an economy which remains heavily dependent on commodity demand and prices.

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