FX Daily: USD breaks out
The USD Index (DXY) broke above its 92-94 range for the first time since late July. Investors continued to seek safety in the greenback amidst another day of sharp sell-off in equities on Wednesday. There was no flight into the JPY and CHF which depreciated above their key levels at 105 and 0.92 per USD respectively. The Dow, S&P 500 and Nasdaq fell by 1.9%, 2.4% and 3.0% respectively. Investors were discouraged that Fed Chair Jerome Powell’s repeated plea to US lawmakers for more fiscal spending has fallen on deaf ears. It did not help that Boston Fed President Eric Rosengren warned that the coronavirus could worsen this autumn and winter, decrease economic activities and put banks under stress by the end of the year. Global demand worries would heighten if Brent crude oil prices join WTI in trading below USD40/bbl. For now, a correction may be due for the DXY after three days of rally with 94 now seen as the support level. Looking ahead, DXY is eyeing its next resistance around 95.6 or its 100-day moving average (MA).
EURUSD ended below 1.17 to 1.1660 for the first time since mid-July. European Central Bank executive board member Yves Mersch joined his colleagues in warning that the exchange rate would have “obvious” effects on inflation. The ECB warned at its last governing council that inflation would remain negative in the coming months; CPI inflation first fell below 0% in August. The ECB has urged the EU to make the EUR750bn pandemic recovery fund permanent. The European Commission has reportedly adjusted its autumn economic forecasts to include the risk of a no-deal Brexit at the end of the transition period on 31 December.EURUSD is likely to be capped around 1.17 and eyeing its next key support levels around 1.1495 (March’s high) and 1.1470 (100D MA).
NZDUSD closed below its 0.66-0.68 range for the first time since 25 August. The Reserve Bank of New Zealand wants to introduce a Funding for Lending Program (FLP) “before the end of 2020”. The goal of the FLP will be to lower the borrowing costs for businesses and households towards the 0.25% official cash rate. The RBNZ is still seen moving to negative rates after its pledge to keep rates on hold expires in March 2021. AUDUSD closed below 0.71 for the first time since mid-July. AUD is likely to remain soft into a Team Australia event on 6 October. On that day, the Reserve Bank of Australia may lower rates at its policy meeting in coordination with the tax cuts and more fiscal spending expected at the Federal Budget 2020 announcement. AUD is also vulnerable to gold prices which finally fell below USD2000/oz to USD1863. Hence,keep a close eye on the next key support level for gold at USD1844 or its 100D MA. The next support levels for AUD and NZD are also located around their 100D MAs at 0.70 and 0.65 respectively.
USDSGD closed at 1.3723 on Wednesday, above its 50-day moving average around 1.37 and its last high around 1.3720 on 9 September. The SGD NEER has, as per our model, been holding close to the mid-point of its neutral policy band since its last policy easing in March. In USDSGD terms, the mid-point of the band has risen with global USD strength to 1.3715 this morning from its 1.3615 low on 18 September. Our projections below show that the SGD will be more sensitive to the EUR than the CNY. Put simply, USDSGD will trade above 1.38 if EURUSD fails to hold its support at 1.15.
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