FX Daily: Guard against complacency

Fed and ECB underpin USD against EUR
Philip Wee28 Sep 2021
    Photo credit: Unsplash Photo

    DXY edged up to 93.4 from 93.3. USD should have appreciated more on weak stock market sentiment and higher US bond yields, but it didn’t. Appetite for the greenback was undermined by Senate Republicans who blocked the bill passed by House Democrats to avert a government shutdown on 1 October and a (possible but improbable) default on US government debt. Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen, who will be testifying today on the pandemic responses before the Senate, are likely to push for bipartisan support (which is desired but not necessary) for the bill. Unlike past episodes, this does not appear to be a cliff-hanger. As a last resort, President Joe Biden and the Democrats could suspend the debt limit on their own. 

    Investors are dealing with more negative factors ahead of October. Dow rose 0.2% while S&P 500 and Nasdaq Composite fell 0.3% and 0.5% respectively. Apart from the Evergrande crisis, China is now facing power shortages that have halted production in some factories, including suppliers to Apple and Tesla. US 10-year treasury yield firmed to 1.487% from 1.451% after Fed Governor Lael Brainard and New York Fed President John Williams showed more support for the Fed to taper asset purchases by the end of this year. Brainard did not dismiss another miss in the September nonfarm payrolls which consensus expects will pick up to 513k from 235k in August. However, US inflation appears to be staying high for longer. WTI crude oil prices rose to USD75.45/bbl, its highest close since October 2018. Goldman Sachs increased its oil price target to USD90 after Hurricane Ida hurt offshore oil drilling capacity in the Gulf of Mexico. 

    DXY will need its largest component, EUR, to weaken to move higher. EUR closed below 1.17 on Monday for the third time in 5-6 weeks. Extending its fall today will break the past two times it recovered above 1.17 the following day. The European Central Bank is more forceful than the Fed that inflation is temporary in the EU, and insistent that its decision to slow down its pandemic emergency purchase programme is not a taper but a recalibration. The same messages are likely to be echoed by the many Fed and ECB officials speaking today.Hence, don’t be complacent in expecting the DXY to repeat its indifference today.


    Philip Wee

    Senior FX Strategist - G3 & Asia

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