FX Daily: Don’t expect smaller Fed hikes like the RBA

USD is no longer overbought
Group Research, Philip Wee05 Oct 2022
    Photo credit: Unsplash Photo

    We are cautious about the USD’s sell-off at current levels. DXY depreciated from 114 to 110 in the past five sessions. The 14-day RSI is longer overbought above 80 and dropped to 46.7 on Tuesday. Markets were encouraged that the Fed might moderate the pace and magnitude of hikes. Apart from the Reserve Bank of Australia’s smaller 25 bps hike (vs 50 bps consensus), US JOLTS jobs opening slowed to 10.1 million in August from 11.2 million in July. The US Treasury 10Y yield eased 19 bps to 3.633%, while 2Y fell 2.1 bps to 4.093%. In turn, investors drove the Dow, S&P 500, and Nasdaq Composite higher by 2.8%, 3.1%, and 3.3%, respectively.

    Fed officials will likely to push back against the market’s attempt to reinstate a less hawkish or dovish pivot. Speaking today, Fed Presidents Neel Kashkari (Minneapolis) and Raphael Bostic (Atlanta) will remind markets that the Fed’s job of controlling inflation is far from over. Consensus expects next week’s CPI and core inflation to hold above 8% YoY and 6% in September. Meanwhile, today’s ADP employment should improve to 200k in September from 132k In August, and Friday’s nonfarm payrolls to slow to 263k from 315k. Let’s see the employment index within the ISM Services PMI holds above 50 for a second month in September.

    AUD depreciated 0.2% to 0.65, still consolidating between 0.6350 and 0.6550. The Reserve Bank of Australia delivered a smaller 25 bps hike to 2.6% yesterday after four 50 bps increases in as many months. With the cash rate target slightly above the 2.5% neutral level amidst a weaker economic outlook for 2023, the RBA will probably keep hiking by 25 bps in November and December. RBA still sees inflation rising to 7.75-8% early next year before slowing towards its 2-3% target range over the next couple of years. Fearing a global recession, Treasurer Jim Chalmers ruled out returning to a budget surplus over the next three years to the next election in 2025. Chalmers will present the Budget on 25 October after conferring with his counterparts at the G20 meetings of finance ministers and central bankers on 12 October. Meanwhile, AUD will take its cue from US equity futures, last signalling a weaker open in the US session.

    Quote of the day
    “We cannot hold a torch to light another’s path without brightening our own.”
          Ben Sweetland

    5 October in history
    The first James Bond movie, Dr No, premiered in London in 1962.

    Philip Wee

    Senior FX Strategist - G3 & Asia


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