FX Daily: Economic and political uncertainties increase


Growth worries matter more than central bank decisions
Philip Wee08 Sep 2021
    Photo credit: Unsplash Photo


    DXY rebounded for the first time since 28 August. Wall Street returned from its Labor Day holiday and did not follow through on the rally in Asia. Investors are vigilant of a correction in October. Dow and S&P 500 fell 0.8% and 0.3% respectively on worries that the Delta-variant would slow US growth in 3Q. As per the Atlanta Fed GDPNow model, the projection for 3Q growth dropped in single day to 3.7% from 5.3%.

     

    USD also rose with the US 10-year treasury yield which firmed 5 bps to 1.37%, its highest level since mid-July. Despite the big miss in last Friday’s US nonfarm payrolls, bond bears could not shake off the drop in the US unemployment rate to 5.2% in August from 5.4% in July, and the pick-up in average hourly earnings growth to 4.3% yoy from 4.1%. The Fed Beige Book today will be scrutinized for a possible Fed taper announcement at the FOMC meeting on 22 September. 

     

    AUD tumbled below 0.74. The Reserve Bank of Australia’s decision to proceed with its plan to buy fewer government securities at a pace of AUD4bn/week from AUD5bn until February 2022 ended up hurting the AUD. Markets reckoned that if the RBA saw a delay in the recovery from the Delta infections, it could have been patient about rolling back stimulus. There were no changes to the RBA’s pledge to keep the targets for the cash rate and the 3-year bond yield at 0.10% through 2024. AUD needs to break below 73.60 or its 50-day moving average to extend its downtrend to 0.73. 

     

    Stay defensive on CAD which depreciated above 1.26 per USD for the first time since 1 September. CAD could weaken more if the Bank of Canada sounds dovish at its meeting today. BOC Governor Tiff Macklem will give an economic progress report on 10 September. Real GDP did not expand in 2Q and contracted by 1.1% qoq annualized instead. The Public Health Agency of Canada warned that daily Covid-19 cases could reach six times the level seen in late July by end-September. The federal elections on 20 September is too close to call and is shaping as a referendum on Prime Minister Justin Trudeau’s Covid-19 policy. 

     

    Growth worries were also evident in GBP and EUR. GBP depreciated below 1.38 and could return to 1.37. Markets brushed aside the hawkish comments by Bank of England member Michael Saunders and focused on slower growth prospects in the coming quarters. Prime Minister Boris Johnson is facing a backlash from breaking a manifesto to hike the National Insurance tax rate by 1.25% across the kingdom. MPs in the House of Commons will vote on the new proposals today. Meanwhile, the European Central Bank will decide if it is time to start a debate about tapering asset purchases at its meeting on Thursday. EUR’s pullback from 1.19 suggests that the ECB will be patient. 


    Philip Wee

    FX Strategist - G3 & Asia
    philipwee@dbs.com
     

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