DXY Slides, Stocks Rally; Yield Curve Steepens Ahead of US CPI

Summary: Risk appetite increased after vaccine makers Pfizer and BioNTech said that a third shot may be effective in fighting the omicron variant according to results from a lab study. The VIX Index, a popular measure of volatility based on the US S&P 500 Stock Index, and often referred to as the “fear gauge” slid 9% to 19.90 from 21.89 yesterday. Ahead of tomorrow’s US CPI report, the treasury bond yield curve steepened. The US 10-year bond rate climbed to 1.51% (1.48%) while the 2-year treasury yield eased 2 basis points to 0.67%. In FX, the Euro (EUR/USD) rebounded 0.67% to 1.1347 from 1.1260 yesterday in choppy trade. Speculative short Euro bets scrambled to cover in typical thin December conditions. The shared currency also benefitted from short covering on the crosses (EUR/GBP, EUR/JPY). A popular gauge of the Greenback’s value against a basket of 6 major currencies, the Dollar Index (DXY) slid 0.49% to 95.90 from 96.35 yesterday. Sterling finished virtually flat at 1.3235 (1.3236) after trading in a volatile range between 1.3159 and 1.3261. Resource leading FX, the Australian Dollar (AUD/USD) extended its gains, climbing 0.76% to 0.7177 (0.7117). Canada’s Loonie finished unchanged versus the US Dollar at 1.2647 after the Bank of Canada left its Overnight Cash Rate unchanged at 0.25%. The Greenback finished little changed versus the Japanese Yen to 113.65 from 113.60 yesterday. Against the Asian and Emerging Market currencies, the Dollar was modestly lower. The USD/SGD pair (Dollar-Singapore Dollar) dipped 0.37% to 1.3611 (1.3660) while USD/THB (Dollar-Thai Baht) was last at 33.43 from 33.63 yesterday.

Wall Street stocks edged higher. The DOW closed at 35,753 from 35,700 while the S&P500 nudged up to 4,697 (4,683 yesterday). The tech heavy US NASDAQ rose 0.3% to 16,367 (16,275).

Data released yesterday saw Japan’s Annual Bank Lending ease 0.6% in November from a previous 0.9%. Japan’s Current Account rose to +JPY 1.03 trillion from +JPY 0.76 trillion. Japanese Final Q3 GDP fell -0.9%, from a previous -0.8%, which was also the median forecasts. Japan’s Economic Watchers Sentiment slipped to 56.3 against forecasts at 57.3. French Q3 Private Payrolls rose 0.5%, unchanged from a previous 0.5%. US JOLTS Job Openings climbed to 11.03 million from a previously upward revised 10.60 million.

  • EUR/USD – the shared currency rallied against the Greenback to its best finish this week, up 0.67% to 1.1347. Overnight the Euro soared to a high at 1.1351 as speculative shorts ran for cover. Traders pushed the EUR/USD pair to an overnight low at 1.1267 before the bounce.
  • AUD/USD – the Aussie Battler extended its gains versus the US Dollar, closing at 0.7177 (0.7117), up 0.76%. The market’s risk-on stance resulted in a rebound in commodity prices. The Comex Copper price finished up 1.24%, aiding the AUD/USD pair. Overnight high traded was at 0.7184.
  • USD/JPY – against the Japanese Yen, the Dollar nudged up to 113.65 from 113.60. The rebound in the US 10-year bond yield lifted the USD/JPY to an overnight high at 113.95 before easing to its New York close. Overnight low traded was at 113.31.
  • USD/CAD – the Greenback closed flat against the Canadian Loonie at 1.2647. Overnight the USD/CAD pair traded to 1.2604 lows before stabilising to climb to its New York close. The Bank of Canada left its Overnight Rate unchanged (0.25%). While the BOC said it expects inflation to remain elevated, it would moderate in the first half of next year (2022).

On the Lookout: Another light economic calendar is in store for today ahead of tomorrow’s US CPI report. Earlier, New Zealand released its Q3 Manufacturing Sales which fell to -2.2% lower than median expectations at 4.2%. The Kiwi (NZD/USD) eased to 0.6805 from its New York close at 0.6813. Australia’s RBA Governor Philip Lowe is due to speak at the Australian Payments Network Virtual Summit (9.05 am Sydney). Japan releases its BSI Manufacturing Index (f/c 5.3 from a previous 7.0). The UK follows with its RICS House Price Balance (f/c 70% from a previous 70%). The RBA releases its RBA Bulletin (comprises relevant economic articles, speeches, statistics). China follows with its November Annual CPI (f/c 2.5% from 1.5% - FX Street), Chinese November PPI (12.6% from 13.5% - FX Street). Japan follows with its November Machine Tool Orders (no forecasts, previous was 81.5%). Germany kicks off European data with its October Trade Balance (f/c +EUR 13.4 billion from previous +EUR 13.2 billion – FX Street), German October Current Account (f/c +EUR 19 billion from +EUR 19.6 billion – FX Street). Switzerland releases its SECO (State Secretariat for Economic Affairs) Economic Forecasts. The US rounds up today’s economic reports with its Weekly Unemployment Claims (f/c 218,000 from 222,000 – Forex Factory).

Trading Perspective: The market’s risk-on stance should continue in typical December conditions. We should expect to see choppy trade within wider ranges. While the Dollar Index (DXY) slid 0.49% to 95.90, much of the move came from the EUR/USD pair (which carries almost 60% weigh in the DXY). The move was a result of short covering in the Euro and other currencies against the US Dollar. Ahead of Friday’s much anticipated US CPI report we should see broad-based support for the Greenback emerge at current levels.

  • EUR/USD – The Euro soared to 1.1351 overnight highs from its opening of 1.1260 yesterday. Immediate resistance can be found at 1.1360 followed by 1.1390. The next resistance level lies at 1.1410. On the downside, immediate support is found at 1.1310, 1.1280 and 1.1250. Overnight low traded was at 1.1267. Look for further choppy trade in a likely range today of 1.1270-1.1370. Prefer to sell EUR/USD rallies to 1.1370.

(Source: Finlogix.com)

  • AUD/USD – The Aussie Battler extended its jump by 0.76% to 0.7177 in late New York from yesterday’s 0.7117. A rebound in commodity prices, a generally weaker Greenback and a rise in risk appetite lifted the AUD/USD pair. For today expect immediate resistance at 0.7185 (overnight high 0.7184). The next resistance level lies at 0.7215 followed by 0.7245. Immediate support can be found at 0.7145 and 0.7115 (overnight low traded was 0.7117). Look for some choppy moves in this puppy too, likely range 0.7120-0.7190. Preference is to sell Aussie rallies. Got my ranges wrong yesterday. But still prefer to sell AUD/USD rallies, even more so at or slightly higher than current ranges.
  • USD/JPY – this currency pair continues to be a trade, with the overall range yesterday between 113.31 (overnight low) and 113.95 (overnight high). The USD/JPY pair closed at 113.65 (113.60 yesterday). A three-basis point rise in the US 10-year bond yield (1.51%) will keep this currency pair buoyed. Immediate resistance lies at 113.95 followed by 114.15. On the downside, immediate support can be found at 113.30 and 113.00. Look for consolidation in a likely range today between 113.35-114.05. Just trade the range shag on this puppy.
  • GBP/USD – Sterling failed to advance against the US Dollar, finishing flat at 1.3235 from 1.3236 yesterday. Overnight the British currency traded to a high at 1.3261. That puts immediate resistance today at 1.3260. The next resistance level is found at 1.3290 and then 1.3720. Immediate support for today can be found at 1.3205, 1.3185 and 1.3155. Look for Sterling to consolidate in a likely range today between 1.3170-1.3270 today. The market’s risk-on stance will keep the British currency supported. Look to buy dips today.

Remember to keep those tin helmets on. Have a top Thursday ahead all. Happy trading!

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