Head of FX Strategy
Summary: The US dollar remains firm after the shocking CPI data from Tuesday and with US Retail Sales for August today the latest data point ahead of the FOMC meeting next Wednesday, where a sizable minority are looking for 100 basis points from the Fed, while US long yields have run out of range to the upside. The Chinese yuan is trading weakly after China passed on easing rates any further overnight and despite the country moving to ease rules on property investment, with USDCNH hitting 7.00 today.
FX Trading focus: USDCNH breaks above 7.00. USD eyes retail sales, new peak in long yields.
The reaction in US yields and the US dollar after the far stronger than expected US August core CPI data from Tuesday is holding up well, with US yields all along the curve perched at or near the highs for the cycle and the 10-year US Treasury benchmark yield running out of range into the key high from June at 3.50%. The US Retail Sales report for August out shortly after this article is published is likely to drive the next step for US yields and the US dollar, which will likely move in the same direction. Somewhere out over the horizon, however, I wonder how the US dollar trades in the event a recession is afoot and investors are still marking down equities, not on a the challenge to multiples from higher yields, but on a profits recession. The past “norm” is for equities to only bottom out during the phase in which the Fed is rapidly easing to get ahead of a cratering economy. For now, the bout of risk off has seen NZD and NOK as the interesting pair of weakest currencies, with AUD and CAD not far behind and sterling struggling a bit more today, even as the market edges up the pricing of the Bank of England next week closer to 75 basis points (still only slightly more than 50/50 odds according to futures prices). Sterling almost can’t hope to perform well if risk sentiment
But perhaps most importantly, the USD sell-off picked up its pace a bit today on USDCNH breaking above 7.00 for the first time since the summer of 2020 and despite constant PBOC pushbacks via setting the daily fixing stronger for the last three weeks and more on a daily basis. Overnight, China kept its rate unchanged as well, though there were a couple of bright spots in thew news from China overnight, as local authorities have listened to Xi Jinping’s calls for easing up on property investment with a raft of measures. As well, the Chengdu Covid lockdowns are easing. Still, any significant extension above 7.00 in USDCNH will have markets on edge, particularly if the 7.187 all time highs come into view.
The USD strength and yield remaining pinned higher have emboldened prevented a further slide in USDJPY after USDJPY traded south of 143.00 overnight. We all know that the BoJ/MoF will more than likely step in if USDJPY trades north of 145.00 again, but note the more profound correction in crosses like AUDJPY, possibly a better place to speculate for a JPY resurgence if risk sentiment remains downbeat. That pair has rejected the recent extension above 97.00, though it probably needs to cut down through 95.00 together with tamer long global yields to suggest something bigger is afoot.
Chart: AUDUSD
The Aussie caught a broad, if brief, bid overnight on a strong August jobs report, but wilted again in today’s trade as risk sentiment deflated once again and as the move lower in the CNH versus the US dollar picked up a bit of extra steam and crossed the psychologically important 7.00 level. Watching the lows for the cycle here below 0.6700 for a possible extension to at least 0.6500 on a break lower and a retest of the cycle lows from June.
Table: FX Board of G10 and CNH trend evolution and strength.
Interesting to note the CHF topping the leaderboard as EURCHF tries at the cycle lows today and Europe can’t get on the same page on its attempts to cap energy prices (drives risk of higher CPI outcomes and more CHF strength to offset). Elsewhere, the NZD is the weakest of the lot, while Japanese officialdom has impressed with its latest verbal intervention, as can be seen in the tremendous momentum shift over the last week in the broader JPY picture.
Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD remains in a positive trend, but it’s at a multi-year range top as we watch whether a proper trend develops. Elsewhere, NZDUSD is grinding down into the psychologically challenging sub-0.6000 levels, while USDCAD is banging on the cycle resistance at 1.3200 and USDNOK is poking at local highs and only a bit more than a percent from its highest close since the pandemic panic of early 2020 around 10.25. Wondering if today will prove a pivot day for EURGBP that confirmed the up-trend.
Upcoming Economic Calendar Highlights
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
