FX Daily: FOMC keeps currencies on edge


Eyeing weaknesses in EUR, GBP, JPY and CNY ahead of FOMC
Group Research, Philip Wee16 Sep 2022
    Photo credit: Unsplash Photo


    DXY is positioning for a hawkish FOMC after rebounding from Tuesday’s 107.7 low on the stronger-than-expected US CPI. It consolidated between 109.3 and 109.9 in the past two sessions. EUR gave back its post-ECB gains and is currently languishing in a 0.9960-1.0020 range from Monday’s high of 1.02. The ECB’s jumbo 75 bps hike last week was a double-edged sword. While positive in closing the gap with Fed hikes, it also adds to the energy crisis seen pushing the Eurozone into recession this winter. GBP is weak after depreciating 0.6% to 1.1467 yesterday, its lowest close since March 1985. The Bank of England’s second 50 bps hike (consensus) on 22 September will fall short of the Fed’s third 75 bps hike a day earlier.

    The Dow, S&P 500 and Nasdaq Composite fell 0.6%, 1.1% and 1.4% respectively. The World Bank did not rule out significant financial stress and a global recession from central banks forcefully tightening monetary policy at the fastest pace to bring down elevated inflation. The US Treasury 2Y yield firmed 7.7 bps to 3.865%, its highest close since October 2007. The 10Y yield firmed 4.5 bps to 3.449%. Consensus is convinced that the Fed will deliver a third 75 bps hike to 3.25% at the FOMC meeting on 21 September. Futures see the Fed Funds Rate ending the year above 4% and hikes extending to 4.5% into early 2023. Markets have taken the Fed’s guidance after Jackson Hole very seriously.



    Today, consensus expects the University of Michigan (UoM) to report an improvement in consumer sentiment to 60 in September from 58.2. Given the stronger-than-expected CPI readings on Tuesday, 1Y inflation expectations might not slow to 4.6% (consensus) in September from 4.8% in August. Yesterday, US initial jobless claims fell for a fifth week from a tight labor market to 213k during the 10 September week, its lowest level since the last week of May. July was also revised to 80.2% from 80.3%.

    In Asia, Japan and China have been pushing back against depreciation pressures on their currencies from monetary policy divergences. Japanese officials are talking tougher to keep alive intervention risks. However, the Bank of Japan’s yield curve control policy remains a drag on the JPY amidst global tightening. USD/JPY tried twice in the past two weeks to break above 145, a resistance that will open the door to test 147.66, the high in 1998. Meanwhile, China’s forex reserve requirement ratio cut from 8% to 6% took effect on 15 September. Authorities have been setting the CNY stronger for more than ten sessions. They did not prevent the offshore USD/CNH from closing above 7 for the first time since July 2020. The onshore USD/CNY rate will likely follow if the USD powers into next week’s FOMC meeting.









    Philip Wee

    Senior FX Strategist - G3 & Asia
    philipwee@dbs.com

     

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). This report is intended for “Accredited Investors” and “Institutional Investors” (defined under the Financial Advisers Act and Securities and Futures Act of Singapore, and their subsidiary legislation), as well as “Professional Investors” (defined under the Securities and Futures Ordinance of Hong Kong) only. It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation.

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Singapore recipients should contact DBS Bank Ltd at 65-6878-8888 for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-6878-8888. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  13th Floor One Island East, 18 Westlands Road, Quarry Bay, Hong Kong SAR

    Virtual currencies are highly speculative digital "virtual commodities", and are not currencies. It is not a financial product approved by the Taiwan Financial Supervisory Commission, and the safeguards of the existing investor protection regime does not apply.  The prices of virtual currencies may fluctuate greatly, and the investment risk is high. Before engaging in such transactions, the investor should carefully assess the risks, and seek its own independent advice.