Risk-On; USD/JPY soars; GBP spikes, BOE Bailey hints rate hike

Dollar Index Dips, Global Bond Yields Climb, Equities Rally

Summary: Bank of England Governor Andrew Bailey hinted that the British central bank is likely to hike interest rates for the first time since the recent onset of the Covid-19 crisis. Speaking at a virtual panel discussion at the G-30 International Banking Seminar on Sunday, Bailey said that recent surge in energy prices risked higher inflation expectations. And that policymakers would have to act if medium term inflation expectations rose. At the close of New York on Friday, Sterling settled at 1.3745 against its opening at 1.3670 against the Greenback, up 0.36%. In early Asian trade this morning, GBP/USD rose modestly to 1.3755. On Friday, a surprise rise in US Headline September Retail Sales by 0.7%, higher than economist’s expectations of a 0.2% contraction lifted US stocks and bond yields but failed to impact the currency. The benchmark US 10-year Treasury bond yield climbed 6 basis points to 1.57%. UK ten-year Gilt rates settled at 1.10% from 1.04% Friday. Wall Street stocks were cheered by the upbeat data. The DOW rose 0.97% to 35,300 (34,927) while the S&P 500 gained 0.62% to 4,473 (4,440). The Dollar Index (USD/DXY), which measures the value of the Greenback against a basket of 6 major currencies, dipped to 93.95 from 94.00. Upbeat risk appetite and higher US bond yields boosted the Dollar against the Japanese Yen to 114.47 (113.67), overnight and three-year highs before easing to settle at 114.27. The Euro was little changed, finishing at 1.1600 (1.1597). New Zealand’s Kiwi (NZD/USD) rose 0.24% to 0.7068 (0.7038) while the Australian Dollar (AUD/USD) was last at 0.7420 (0.7417 Friday). Against the Emerging Market and Asian Currencies, the Greenback was mostly flat. The USD/CNH pair closed at 6.4300 (6.4350 Friday) while USD/SGD was last at 1.3480 from 1.3485.
Data released on Friday saw Japan’s Tertiary Industry Activity fall more than expected by -1.7% from a previous -0.6%, and forecasts at -0.3%. Italy’s August Trade Balance (Surplus) slipped to +EUR 7.32 billion, lower than median estimates at +EUR 9.23 billion. US September Headline Retail Sales rose 0.7% matching August’s rise of 0.7%, beating forecasts at -0.2%. Core US September Retail Sales were up at 0.8%, bettering expectations of 0.5%. US New York Empire State Manufacturing Index fell to 19.8 from a previous 34.3, missing estimates at 25.0. US Final Wholesale Sales in August slipped 0.3% against median estimates of 0.5%. Canada’s Final August Wholesale Sales eased to 0.3%, slightly lower than forecasts of 0.5%. US Preliminary University of Michigan Consumer Sentiment for October dipped to 71.4 from 72.8, and median expectations at 73.2.

• GBP/USD – The British Pound outperformed, climbing 0.36% to 1.3745. Comments on Sunday which hit the wires early Monday morning in Asia lifted the GBP/USD pair to 1.3755. Overnight Sterling traded to a low at 1.3668.

• USD/JPY – The US Dollar rallied against the Japanese Yen on the higher US bond yields and upbeat market sentiment. In early Asia, the USD/JPY was trading at 114.22 (113.67 Friday). Overnight the Greenback hit fresh 3-year highs at 114.47. Japan’s 10-year bond yield closed flat at 0.07%.

• AUD/USD – settled at 0.7420, little changed from Friday’s 0.7417. Overnight the Aussie hit high at 0.7440, not seen since early September. Overnight low traded was at 0.7397.

• EUR/USD – The Euro traded in a lacklustre range between 1.1588 and 1.1619. In late New York trade, the EUR/USD was last at 1.1600. On Saturday, Christine Lagarde speaking at an IMF event, said that the European Central Bank would continue to support the economy to stabilise inflation at their 2% target over the medium term.

On the Lookout: The week ahead see a modest economic data calendar. Today kicked off with New Zealand’s Q3 Annual CPI report which rose 2.2%, beating median estimates at 1.5%, and Q2’s 1.3% rise. The Kiwi (NZD/USD) spiked to 0.7107 highs from New York’s close at 0.7075, settling at a current 0.7095. The Australian Dollar was also higher, currently trading at 0.7435 (0.7420 Asia open).
China releases its trifecta of Retail Sales (f/c 3.3% from previous 2.5% - ACY Finlogix), Q3 GDP (f/c 5.2% from 7.9% - ACY Finlogix) and Fixed Asset Investment (f/c 7.9% from 8.9%). China’s Unemployment Rate is forecast to remain unchanged at 5.1%. China also releases its Industrial Production for September (f/c 4.5% at 5.3% - ACY Finlofix). There are no European or UK economic data released today on the calendar. Canada starts off North America with its September Housing Starts (f/c 255,000 from 260,200 – ACY Finlogix). The US rounds up the day’s reports with its US September Industrial Production (f/c 0.2% from 0.4% -ACY Finlogix), US September Manufacturing Production (f/c 0.1% from 0.2% - Acy Finlogix), US September Capacity Utilisation (f/c 76.5% from 76.4% - ACY FInlogix).

Trading Perspective: The upbeat US Retail Sales report failed to lift the US Dollar much higher against its Rivals apart from the yield sensitive Japanese Yen. Speculative market bets have been adding to their long Dollar positions which may have hit a peak. A corrective move lower may be in the making. The Dollar Index (USD/DXY) eased modestly to 93.95 from 94.00 at the start of trading on Friday. Last week, the popular gauge of the Greenback’s value against a basket of 6 major currencies rose to a September 2020 high at 94.56 before pulling back. The only reason the USD/DXY didn’t ease further on Friday was due to a rally in the USD/JPY pair. As the week kicks off, we can expect consolidation as more economic data is released. The culmination is Friday’s US Retail Sales.
The other factor that traders will monitor is Central Bank Speak. The BOE’s Bailey and ECB’s Lagarde both spoke over the weekend. The other global central banks are expected to follow the lead of the US Fed in tapering bond purchases. Traders will be watching for the timing and extent of tapering.

• USD/JPY – Rising US bond yields have seen the US Dollar gain versus the Japanese Yen in the past 6 of 7 trading sessions. On Friday night, the USD/JPY soared to an overnight and 3-year peak at 114.47 before easing to settle at 114.25 in late New York. In early Asia, the USD/JPY pair edged up to its currency 114.32 level. Immediate resistance can be found at 114.50 followed by 114.80 and 115.10. Immediate support lies at 114.00 and 113.70. New Japanese Finance Minister Shunichi Suzuki issued his second warning against any sharp moves in the Yen. This is the first salvo from “Japan Inc” on the Yen. Vigilance is warranted. Likely trading range today 113.70-114.70. Preference is to sell rallies.

• GBP/USD – Sterling rallied on the back of Bailey’s comments that the Bank of England would have to act to contain inflation. In early Asia, the GBP/USD pair spiked to 1.3769 highs before easing to its current 1.3760. For today, immediate resistance can be found at 1.3775 (overnight high traded was 1.3773). The next resistance level is found at 1.3800. Immediate support can be found at 1.3720, 1.3690 and 1.3665 (overnight low 1.3668). The week ahead sees Bailey speaking at joint BOE and Bank of Italy online conference. UK CPI is released Wednesday. Could be fireworks on the Pound this week. Likely range today 1.3670-1.3770. Prefer to sell into Sterling strength.

• AUD/USD – The Aussie Battler finished little changed against the Greenback on Friday at 0.7420. Overnight high traded was 0.7440, which is where today’s immediate resistance lies. The next resistance level is found at 0.7480. Immediate support can be found at 0.7400 followed by 0.7370. Look for the Aussie to consolidate in a likely trading range today of 0.7385-0.7445. Preference is to sell rallies.

NZD/USD – The Kiwi was the next best performing FX to the Pound, finishing up 0.24% against the Greenback at 0.7068 in New York (0.7038 Friday). This morning, New Zealand’s Q3 CPI soared to 2.2% from Q2’s 1.3%, beating analyst’s median forecasts at 1.5%. The NZD/USD pair jumped initially to 0.7107 before settling at 0.7095 currently. For today immediate resistance can be found at 0.7110 followed by 0.7130 and 0.7150. Immediate support lies at 0.7070 (Friday’s close) followed by 0.7040. Looking for consolidation in a likely trading range today of 0.7070-0.7120. Prefer to sell rallies. May be ideal shoot the Bird down, its flying too high just yet.