FX Daily: No breakout of 3Q ranges

Not doing much before next FOMC meeting
Philip Wee10 Sep 2021
    Photo credit: Unsplash Photo

    Quote of the day
    “The lady isn’t tapering”
    ECB President Christine Lagarde

    The European Central Bank meeting did not lift the EUR. The single currency fluctuated between 1.1800 and 1.1840 throughout Thursday. ECB President Christine Lagarde insisted that the decision to moderately slow its EUR1.85tn pandemic emergency purchase program (PEPP) in the next three months was not a tapering but a recalibration from the EUR80bn per month pace it adopted since March. According to its new forecasts, the ECB viewed this year’s growth rebound and higher HICP inflation above its symmetric 2% target as transitory. The EU 10-year bond yield eased 4 bps to minus -0.36% by the end of the session, consistent with the ECB’s worry about inflation being too low rather than too high over the medium term. EUR faces downside risks if the Fed keeps its PCE inflation forecasts above 2% at its FOMC meeting on 22 September.

    On the other hand, the USD is not falling after the big miss in last Friday’s US nonfarm payrolls. Fed Governor Michelle Bowman joined her colleagues to brush aside the weak payrolls and support a decision to taper asset purchases before the year is out. It helped that US initial jobless claims fell to 310k for the week to 4 September, its lowest level before the pandemic outbreak in March 2020. At its FOMC meeting a fortnight from today, the Fed is expected to view the recovery constructively and take a view that the US labor market has achieved sufficient progress to taper asset purchases but not the “significant progress” needed to hike rates. With US inflation well above its peers, the Fed has few reasons not to join Canada, Australia and the Eurozone in moderating the pace of asset purchases. Meanwhile, US Treasury Secretary Janet Yellen urged Congress to suspend the federal debt limit before the government runs out of cash in October. House Speaker Nancy Pelosi said on Wednesday that Democrats would seek bipartisan vote instead of resorting to the reconciliation process to address the issue.

    For now, currency markets show no urgency to break out of recent ranges. Since July, DXY fluctuated mostly within 92-93 while its largest component, EUR, traded between 1.17 and 1.19. Similarly, CAD held mostly inside a 1.24-1.28 range. JPY did not deviate far from 100 per USD while CHF kept within 0.9100-0.9250 over the past month. The recent recovery in Asian currencies stalled around 6.45 per USD for the CNY, 4.15 for the MYR and 50 for PHP. Other currencies met resistance at 1.34 for the SGD, 14200 for IDR, 73 for INR, 1155 for KRW and 32.2 for THB.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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