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DXY closed around 108.8 for a third session, fluctuating between 107.5 and 109.5 since the Fed’s Jackson Hole Forum on 25 August. Its largest component, EUR, closed above parity for the first time in seven sessions but is still in a 0.99-1.01 range. Germany’s stronger-than-expected CPI inflation in August (7.9% YoY actual vs 7.8% consensus and 7.5% last) is likely to spill over into today’s Eurozone CPI estimate (9% YoY consensus vs 8.9% previous). Hawkish European Central Bank officials want another 50 bps hike at the governing council meeting on 8 September. Conversely, GBP depreciated 0.5% to 1.1656 on UK recession fears, below 1.17 for the first time since the Covid-19 outbreak in March 2020. Apart from testing 139 twice, USD/JPY has been stuck in a 138-139 range on Monday and Tuesday.
S&P 500 and Nasdaq Composite fell 1.1% each on Tuesday. Investors brushed aside the stronger-than-expected US consumer confidence in August (103.2 actual vs 98.0 prior) from a better business and stock market outlook. However, Fed Chair Jerome Powell warned last Friday that reducing inflation would require a sustained period of below-trend growth, a softer labor market and some pain to households and businesses. Yesterday, New York Fed President John Williams kept the door open for a third 75 bps hike at the FOMC meeting on 21 September if data supports one. Williams also ruled out rate cuts in 2023. Given the Fed’s stance, good data are considered negative for markets.
US Treasury 10Y yield was unchanged at 3.10%; 2Y firmed 2 bps to 3.44%. Bloomberg consensus is still calling for 50 bps Fed hike next month. The market brushed aside the better-than-expected JOLTS job openings (11.2mn actual vs 10.4mn consensus) because they were for July. Tomorrow’s initial jobless claims for the 27 August week (248k survey vs 243k previous) will be more relevant for Friday’s August nonfarm payrolls (300k consensus vs 528k previous). As a preview to the CPI data on 13 September, consensus is looking for prices paid in Thursday’s ISM manufacturing PMI survey to fall to 55.3 in August from 60 in July.
USD/CNY kept a 6.90-6.92 range for a second day. Some players believed that USD/CNY would breach the 7 handle from monetary policy divergences, i.e., China’s latest rate cuts to stabilize growth vs the Fed’s renewed commitment to control inflation. China is pushing back with stronger-than-expected daily fixings, which were viewed as slowing the pace of depreciation. Unless the USD pushes dramatically higher from here against the Developed Market and Emerging Asian currencies, USD/CNY will probably be capped around the 6.95 levels seen in late 2016 and 2018.
Quote of the day
“History repeats itself, first as a tragedy, second as a farce.”
Karl Marx
31 August in history
Princess Diana died in a car crash in a road tunnel in Paris in 1997.
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