FX Daily: USD softened with US CPI inflation
DXY plunged 1.1% to 105.22 on the lower-than-expected US CPI inflation. JPY appreciated most by 1.6% to 132.89 per USD from speculators unwinding their monetary divergences bets. In Europe, CHF, GBP and SEK gained 1.1-1.2%. The DXY’s tone will weaken if its largest component, the EUR, appreciates from its month-long 1.01-1.03 range into the 1.04-1.08 band seen in May-June. To achieve this, the single currency must will take out the resistance at 1.0340 or 50d moving average (MA) and press the next hurdle at 1.0530 (100d MA). Similarly, GBP needs to push above its 1.20-1.23 range. Unlike the EUR, GBP is not below but above its 50d MA (1.2140), setting its sights at the 100d MA (1.2430). Since the end of July, USD/JPY has held below its 50d MA (last at 135.30) but has yet to force below its 100d MA (131.20).
The UST 10Y yield initially plunged to 2.67% before recovering to 2.78%, barely changed from a day ago. Fed Presidents Charles Evans (Chicago) and Neel Kashkari (Minneapolis) pushed back against the market’s dovish Fed pivot. Evans wanted the Fed Funds Rate to rise from 2.5% to 3.5% this year and 4% next year. Kashkari was more hawkish, projecting the FFR at 3.9% and 4.4% by the end of 2022 and 2023 respectively. The Fed was believed headline and core inflation unacceptably high against the official 2% target. However, Fed Funds Futures still see rates rising to 3.43% in December before easing to 3.15% by the end of next year. The UST 2Y yield ended Wednesday lower by 5.6 bps to 3.21%, unconvinced of a third 75 bps hike in September. Markets doubt the Fed can keep delivering outsized hikes without tipping the US technical recession into a hard landing.
Commodity currencies rallied on improved risk appetite from soft landing hopes. NZD and AUD appreciated most by 1.8% each. CAD rose by half the pace at 0.9%. Dow, S&P 500 and Nasdaq Composite rallied 1.6%, 2.1% and 2.9% respectively. The US Treasury (UST) yield curve, as per the 10Y-2Y spread, became less inverted at -43 bps vs -49bps (worst level since 2000) a day ago. AUD appreciated to 0.7089 (100d MA), its highest close since 9 June. The next technical resistance is around 0.7120-0.7140 but support at 0.7050 looks firm. Australia’s stronger-than-expected business conditions on resilient demand should build a case for AUD to hold a 0.70-0.75 range. NZD might have returned to the mid-point of a possible 0.62-0.64 range. To push this range’s upper half, NZD needs to first overcome 0.6440 (100d MA).
Quote of the day
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