Ongoing hawkish Fed speak lifts US bond yields, Dollar Index soars

RBNZ Hikes 50 bps, Kiwi Plunges; Euro Slumps; US Payrolls Up Next

Summary

The Dollar Index (USD/DXY), a favoured gauge of the Greenback’s value against a basket of 6 major currencies, soared a whopping 1.95% to 112.12 (111.21).

Further ongoing hawkish comments from Federal Reserve officials boosted US bond yields and the Dollar. Incoming Fed Board member Lisa Cook said more hikes were needed to combat inflation.

Chicago Fed President Charles Evans said that he expected US policymakers to deliver up to 125 basis points of rate increases before year end.

The benchmark US 10-year bond yield jumped 7 basis points to 3.82% while two-year US treasury rates climbed to 4.25% from 4.15%. Other global rates rose but to a lesser degree. Germany’s 10-year Bund yield rose 6 basis points to 3.08%.

New Zealand’s Kiwi (NZD/USD) plunged 2.1% against the Greenback to 0.5655 (0.5742 yesterday) after the RBNZ raised its Official Cash Rate by 50 bps (to 3.50%). Which was totally discounted.

The Australian Dollar slid 1.55% to 0.6412 (0.6490). On Wednesday, the RBA raised rates by a dovish 25 bps which when combined with a strong Greenback, weighed on the Aussie Battler.

Against the Japanese Yen, amidst risk-off, the Greenback rallied a modest 0.45% to 145.08 from 144.60. It was the first New York close above the 145.00 USD level since August 1998.

Elsewhere, Germany’s Factory Orders slumped in September to -2.4% from a previous upward revised 1.9%, and larger than forecasts of -0.8%. The Euro slid to 0.9798 from 0.9882.

Broad based US Dollar strength and risk-off sentiment pushed Sterling (GBP/USD) lower to 1.1157 from 1.1322 yesterday. The British currency continued its roller coaster ride, hitting a high at 1.1383.

The likelihood of further global rate increases to tame inflation raised recession concerns among market participants. Global stocks tumbled. The DOW fell 1.12% to 29,930 (30,245 yesterday).

The risk-off theme saw Asian and Emerging Market Currencies weaken against the US Dollar. Against the Offshore Chinese Yuan, the Dollar (USD/CNH) rallied to 7.0815 from 7.0700 yesterday.

USD/SGD rose to 1.4290 from 1.4240 while the USD/PHP (US Dollar-Philippine Peso) was up 0.4% to 59.05 from 58.83 yesterday. USD/INR (Dollar-Indian Rupee) soared to 82.25 (81.65).

Other economic data released yesterday saw UK Construction PMI in September climb to 52.3 from a previous 49.2. Eurozone Retail Sales matched estimates with a -0.3% result in September.

US Weekly Claims for Unemployment Benefits rose to 219,000 from 190,000 and higher than estimates at 205,000. Canada’s September IVEY PMI fell to 59.5 from 60.9, missing forecasts at 62.3.

• EUR/USD – The Euro’s recovery against the US Dollar was short-lived and the shared currency slumped to 0.9798 (0.9882). In choppy trade, the overnight low was at 0.9788. Broad-based USD strength and expected weaker German GDP data weighed on the Euro.
• USD/JPY – Against the yield sensitive Japanese Yen, the Greenback rallied to 145.10 overnight highs before settling in late New York at 145.08. It was the first close above 145.00 since 1998. Overnight low recorded was at 144.38.
• NZD/USD – The Kiwi had its wings clipped after the RBNZ hiked interest rates by 50 basis points, totally discounted by the markets. Following the move, the Kiwi briefly rose to 0.5814 overnight high before plunging to 0.5665. Overnight low traded was at 0.5640.
• AUD/USD – Finished lower against the overall stronger Greenback and weaker Asian and EMFX currency pairs. The Aussie closed at 0.6412 from 0.6490. Overnight low traded was at 0.6389 while the overnight high traded was at 0.6541. Trading has been choppy following the RBA’s decision to hike rates 25 bps, considered dovish by most traders.

(Source: Finlogix.com)

On the lookout

Focus moves to the US Non-Farms Payrolls report for September today (11.30 pm tonight in Sydney, 9.30 pm Asia).

Ahead of that, Japan kicks off today’s data releases with its August Average Cash Earnings (m/m f/c 0.2% from -1.4%; y/y f/c 6.7% from 3.4% - ACY Finlogix). Watch for any revisions to this set of data, the expectations vary widely from the previous report and forecasts.

Australia follows with its RBA Financial Stability Review. Japan then releases its Preliminary August Leading Economic Indicator (f/c 100.2 from 98.9 – ACY Finlogix), and Coincident Index (f/c 101.1 from 100.1 – ACY Finlogix).

Switzerland starts off Europe with its September Unemployment Rate (f/c 2% from previous 2% - ACY Finlogix). Germany releases its August Retail Sales (m/m f/c -1.1% from 1.9%; y/y f/c -4.3% from -2.6% - ACY Finlogix). Watch for revisions to this set of data as well, forecasts vary widely.

Germany also releases its August Industrial Production (m/m f/c -0.5% from -0.3%). France releases its August Balance of Trade (f/c -EUR 14.83 billion from previous -EUR 14.54 billion – ACY Finlogix).

Italy follows with its August Retail Sales (m/m f/c -0.5% from 1.3%; y/y f/c 1.5% from 4.2% - ACY Finlogix). Switzerland follows with its September FX Reserves (f/c CHF 855 billion from CHF 859.64 billion – ACY Finlogix).

Canada kicks off North America with its September Employment Change (f/c 20k from -39.7k), Canadian September Unemployment Rate (f/c 5.4% from 5.4% - ACY Finlogix).

The US releases its September Non-Farms Payrolls (f/c 250k from previous 315k), US September Unemployment Rate (f/c 3.7% from 3.7%) and US Average Hourly Earnings (m/m f/c 0.3% from 0.3%).  US Employment Data Expectations are from ACY Finlogix.

On Saturday, China releases its September Caixin Services PMI (f/c 54.8 from 55 – ACY Finlogix).

Trading perspective

The rise in US bond yields saw the Greenback renew its uptrend against its rivals amidst ongoing hawkish Fed rhetoric. This will keep the US Dollar bid in Asia and early Europe today until the release of the US Payrolls report. Anything weaker than what is expected could set a spanner in the works of the Greenback’s ascent. Watch the September Payrolls number. ACY Finlogix and FX Street forecasts are for fall in Employment to 250k from 315k. A number below 250k, say between 210k to 220k will see a Dollar correction lower. On the flip side, we would need to see a larger Payrolls number than 250k, say 280 to 300k to push the Dollar to new heights. Watch for revisions to previous reports as well as the Unemployment and Earnings data.

Watch those US bond yields, they have been driving the currency, and may well continue to do so today. It's Friday Payrolls, expect another riveting, roller coaster ride in the world of FX!

Have a good Friday ahead and top weekend all.

• EUR/USD – The Euro extended its decline against the Greenback after an overnight rally failed. The shared currency closed at 0.9798 (0.9882 yesterday). Weaker German Factory Orders and the broadly based stronger Greenback weighed on the EUR/USD pair. Immediate support lies at 0.9785 followed by 0.9765 and 0.9735. Immediate resistance is found at 0.9830, 0.9880 and 0.9930. Look for more choppy trade, likely range 0.9780-0.9880. Ahead of NFP, trade the range.
• AUD/USD – Risk-off, broad-based US Dollar strength and weaker Asian and EMFX weighed on the Aussie Battler, which closed at 0.6412 (0.6490 open). Overnight low traded was at 0.6389. Immediate support today lies at 0.6380 followed by 0.6350. On the topside, look for immediate resistance at 0.6450, 0.6500 and 0.6550. The Aussie will continue to trade heavy in the current environment unless we see a dovish US Payrolls report. Likely range 0.6370-0.6520. Sell rallies still the way to go until the US NFP report.
• GBP/USD – Sterling extended its slide against the Greenback to 1.1157 NY close from yesterday’s open at 1.1322. Overnight low saw the British Pound plunge to 1.1112 against the Greenback. The overnight high recorded was at 1.1383. For today, look for immediate support at 1.1130, 1.1100 and 1.1070. On the topside immediate resistance lies at 1.1200, 1.1250 and 1.1300. Look for another choppy session likely between 1.1120-1.1320 today. Preference is still to sell into Sterling strength.
• USD/JPY – The Dollar grinded higher against the Japanese currency, settling 0.45% higher to 145.08 (144.60 yesterday). Overnight high traded was at 145.10. Higher US bond yields will continue to drive this currency pair north. However, traders should be wary of any further strong rallies above the 145.00 level. Japan Inc may show their displeasure should the Greenback rally further. Earlier this week, Finance Minister Shunichi Suzuki said that the government stood ready to intervene in the currency markets to prevent deeper losses in the domestic currency. On Monday the USD/JPY traded to an overnight high at 145.32 before tumbling lower. Immediate resistance lies at 145.20 and 145.50. Immediate support is found at 144.80 and 144.50. Look for a choppy session between 144.40-145.20 pre-NFP.

Have a good NFP Friday ahead, Happy trading. Top weekend to all.