FX Daily: Testing resistance levels on risk aversion


Investors worry US recovery levelling off with inflation.
Philip Wee15 Sep 2021
    Photo credit: Unsplash Photo


    The selling pressure on the USD from US CPI data was short-lived. DXY initially fell to 92.3 after US CPI inflation less food and energy eased to 4.0% yoy in August; consensus expected a smaller fall to 4.2% from 4.3% in July. Although the US 10-year treasury yield eased to 1.284% from 1.326%, US stocks sold off aggressively and returned DXY to 92.6 or Tuesday’s opening level. The Dow Jones Industrial Average fell 0.8% to 34578, beneath its 100-day moving average for the second time in three sessions. Risk aversion will increase if the S&P 500 index extends its fall below 4429 or its 50-day moving average. Every major sector in the S&P 500, especially financials, fell in the overnight session. Investors worry that the broader US recovery might be levelling off with inflation too. Sentiment was also weighed by the Democrats’ push to lift the US corporate tax rate to 26.5% from 21% to finance President Joe Biden’s USD3.5tn economic agenda. Fears of a stronger regulatory hand emerged from Senator Elizabeth Warren’s push for the Fed to break up Wells Fargo bank.

     

    China slowdown worries will increase if today’s data fall short of expectations too. Consensus expects China’s retail sales to slow to 7.0% yoy in August from 8.5% in July, and industrial production to 5.8% from 6.4%. The Financial Times reported that President Xi Jinping turned down President Joe Biden’s request for a face-to-face summit to thaw relations during the phone call that lifted markets last week. Pay close attention to the Shanghai Composite and the CSI 300 indices which fell 1.4-1.5% yesterday. CNY appreciated below 6.44 per USD this morning on a Bloomberg report that Chinese banks were offloading US dollars to alleviate the tighter liquidity in the onshore market. This will be short-lived if monetary policy easing expectations return.

     

    Although risk aversion favours the USD, our momentum and trend models do not see large moves in currencies in the short-term. In Southeast Asia, USD/SGD and USD/MYR bounced off their support levels at 1.34 and 4.15 respectively. USD/THB and USD/PHP look set to test their resistance levels at 33 and 50 again. In the commodity space, AUD/USD and NZD/USD are also eyeing key support levels at 0.73 and 0.71 while USD/CAD may push above 1.27. In Europe, EUR/USD and GBP/USD are likely to test their support level at 1.18 and 1.38 respectively.





     

    Philip Wee

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


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