Forex today: VIX, dollar and yen winners, GBP (hard-Brexit) and higher-betas are losers

Forex today carried a risk-off tone (China data miss didn't help) as markets factor in higher borrowing costs and a tighter Fed.This put the US dollar on the offense with the DXY up to test the neckline resistance within a day's range of between 90.308 - 90.698. However, correlations were all out of whack with a spike in the VIX through the psychological 20 level. However, at least with the US yields slipping, (longer dated treasuries under demand end of month) stocks were also on the backfoot. 

US 10yr treasury yields dropped from 2.91% to 2.88%,  unwinding Powell’s testimony leap yesterday. Two-year yields consolidated between 2.26% and 2.28% - the latter a fresh 10-year high as traders gauged Fed's policy will be sharpening the pencils to put more dot plots on the map at next months FOMC minutes. However, Fed fund futures continued to price four more hikes by end-2019. 

(Note: Powell returns to Congress on Friday Asia / Thursday GMT)

US data: 

• US Q4 2017 PCE unrevised at 3.8pct vs. est 3.7pct and prev 3.8pct.
• US Q4 GDP price index revised down to 2.3pct vs. est 2.4pct and prev 2.4pct.
• US Q4 PCE price index revised down to 2.7pct vs. prev 2.8pct.
• US Q4 core PCE price index unrevised at 1.9pct vs. est 1.9pct and prev 1.9pct.
• US Chicago PMI Feb: 61.9 (est 64.1; prev 65.7).
• US pending home sales (m/m) Jan: -4.7% (est 0.5%; prev 0.5%).

As for other currencies, the single currency was heavy on the back of outright US dollar strength and offers in the cross as the yen catches a safe haven bid. EUR/USD entered the trading rooms in NY -0.12% near 1.2220 weighed by EZ Inflation with the Flash YY for Feb at 1.2% vs previous 1.3%. There was a test below the 1.22 handle but that was cleaned up by bargain hunters before yet another bout of dollar strength late in the day taking the pair down into the 1.2180's for the handover.

GBP/USD was a whitewash and the worst performer in both the European and US session. Sterling was weighed by Brexit sentiment once again that trumps the prospects of higher rates from the BoE that had otherwise been the bull's saviour in the absence of Brexit headlines of late. The pound dropped around 0.9% right through the 1.38 handle from the previous territory upon the 1.39 handle. A low of 1.3756 was made. EU’s Barnier sees the transition period ending by Dec 2020 and that is considerably shorter than what the UK had been wanting this a hard Brexit looking increasingly likely. 

EUR/GBP flew on the news and it might be expected at the end of the month, as usual, that flows were favoring a repatriation of trade flows on the bid for the cross. EUR/GBP ended NY 0.8854, within an NA range of between 0.8860-0.8780 vs the European business that was changing hands between a range of 0.8780 to 0.8810.

The dollar struggled against the outperforming Japanese Yen that had been advancing since yesterday's Aussie session and right through European trade, handed over on a silver plate to the yen bulls in NY. USD/JPY fell from 107.52 in the Tokyo high to as low as 106.57 in NY trade today, with the yen taking up the safe haven bid. Japanese importers might come in at 106.00 territories again supporting the major cross ahead of key support 105.55, (potential jawboning territory).

As for the antipodeans, higher beta Fx is struggling to stay above water in this volatile and dollar-friendly environment. AUD/USD testing 200 DMA support after metals hammered for the second day. 0.7820 top side caps recovery attempts but risk-off AUD/JPY plays weigh later in the day again as traders await Aussie CAPEX and China Feb Caixin Mfg PMI. NZD/USD slipped from 0.7240 to 0.7210 for a three-week low. 

Key events ahead:

Analysts at Westpac offered their outlook for the key events coming up.

"The week’s Australian data highlight is at 11:30am Syd/Mel when we see Q4 actual capital expenditure plus surveys of business investment plans for the remainder of 2017/18 and the first estimate of 2018/19 plans. We look for a 1% q/q, 4% y/y rise in capex, with the unwinding of the mining investment boom largely complete and signs of life in non-mining investment.

As for investment plans, we caution that the first estimate for any fiscal year is wildly unreliable, so is best ignored. All we can be confident about is that it will be a long way below the 5th estimate of 2017/18, which could be around A$112bn. The intentions by industry will be closely watched. AUD often moves at least a little in response to this report.

Asia’s data calendar is busy with Feb manufacturing surveys, including the unofficial China survey.

The US data calendar includes the Fed’s preferred inflation measure, the PCE deflator (price index of personal consumption expenditure). The core measure is expected to remain at 1.5%yr. It has been below the Fed’s 2% target since 2012.

Fed chairman Powell concludes his semi-annual congressional testimony by taking questions from the Senate Banking Committee."

Key notes from US session:

Funda/political wrap: Italian politics to shake up the euro next week?