FX Daily: Tornadoes on Terrible Tuesday

US CPI underpins Fed hikes and the USD.
Group Research, Philip Wee14 Sep 2022
    Photo credit: Unsplash Photo

    DXY rebounded with a vengeance by 1.4% to 109.82, threatening to break above 110 again. S&P 500 plummeted 4.3%, its largest single-day fall since June 2020. Dow and Nasdaq Composite Index also plunged 3.9% and 5.2% respectively. The US Treasury 2Y yield scurried 18.5 bps to 3.756%; 10Y rose 5 bps to 3.408%. Fed Funds Futures now see the Fed delivering a third 75 bps hike to 3.25% on 21 September and ending the year above 4%. The dot plot has become the focal point at next week’s FOMC meeting. Markets need guidance on where and when the Fed Funds Rate will peak and pause. 

    Markets betted too heavily on US CPI inflation falling with gas prices. Headline inflation did not decline by the 0.1% MoM consensus; it rose by 0.1% instead. More importantly, after stripping out food and energy prices, core inflation was strong at 0.6% MoM, double the 0.3% expected. The strength of core inflation over headline inflation reflected the second-round effects keeping the Fed awake. Falling gasoline prices did not offset the increases in rent, medical care, transportation services, and restaurant meals. Companies appear able to pass higher costs to consumers amidst the tight labour market keeping incomes growing. Investors were too quick to cheer the lower inflation expectations in the New York Fed’s Survey of Consumer Expectations. Yesterday, we highlighted the NYF’s underlying inflation gauge as a better guide on Fed hike expectations. The past three Fed hike cycles ended when the gauge (last at 4.7% in July) fell back to 3%.

    Despite some short covering in the Asian session, currencies may be pressured again during the European session. AUD and NZD suffered the most from risk aversion, shedding 2.3% of their values each in the overnight session. AUD reported its lowest daily close at 0.6730 for the year. Taking out 0.6682, the intra-day low in July, could send the Oz lower. NZD closed below 0.60 for the first time since May 2020; the Covid low was 0.57 in March 2020. The sell-off in tech stocks should weigh on the KRW and the SGD. JPY and CNY are unlikely to shake off monetary policy divergences. In Japan, markets are likely to test the resistances for USD/JPY and the 10Y JGB yield at 145 and 0.25% respectively. In Europe, EUR closed below parity and GBP below 1.15. Sentiment remains less hawkish than the Fed with the European Central Bank’s jumbo 75 bps hike behind us, and the Bank of England meeting likely to disappoint with a 50 bps hike (consensus) one day after the FOMC next week. Our NowCast model sees the US economy exiting its technical recession in 3Q22. Conversely, consensus expects EU and UK growth to turn negative in 4Q22.

    Quote of the day
    “First they ignore you, then they laugh at you, then they fight you, then you win.”
          Mahatma Gandhi

    14 September in history
    India’s Constituent Assembly adopted Hindi as an official language in 1949.


    Philip Wee

    Senior FX Strategist - G3 & Asia


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