FX Daily: Strong USD faces resistance from Japan, the UK and China
DXY depreciated 1.3% to 112.60 in the overnight session. The last few times an overbought DXY fell this much in a day were 16 June this year and 26 March 2020. Despite the Fed’s hawkish narrative, US bond yields are off Wednesday’s highs in sympathy with their UK counterparts following the intervention by the Bank of England. However, equity investors could not shake off the Fed’s determination to slow demand to control inflation. Dow, S&P 500 and Nasdaq Composite fell 1.5%, 2.1% and 2.8% respectively. Consensus expects today’s US PCE core inflation to rise to 0.5% MoM in August from 0.1% in July or to 4.7% from 4.6% in yoy terms.
As the third quarter ends today, the USD’s strength has run up against interventions from Japan and the UK, besides reprisals from China after the last jumbo Fed hike on 21 September. China will be away for the Golden Week holidays next week. Attention will turn towards the US midterm elections on 8 November and Europe’s readiness to weather winter without Russian energy.
GBP rebounded 2.1% to 1.1117. Bank of England Chief Economist Huw Pill affirmed that there would be a significant response to the crisis triggered by the mini-budget at the next monetary policy committee meeting on 3 November. The market believes the BOE might hike 100 bps to 3.25% after pledging to buy long-dated government bonds until 14 October to stabilize the Gilt market. The 10Y Gilt yield retreated from Wednesday’s 4.6% high to 4.14% on Thursday. Expect Chancellor Kwasi Kwarteng to stand his ground on the mini-budget during his keynote address at the Conservative party conference on 3 October.
CNY rebounded to 1.1% to 7.1250 per USD, 0.2% above the fixing. Yesterday, the People’s Bank of China stated on its website against betting on a one-sided appreciation in the exchange rate. On Wednesday, PBOC told banks to reinstate the counter-cyclical factor in their daily fixings. USD/CNY held more than 1% above the fixing after the Fed lifted its end-2022 rate forecast to 4.4% from 3.4% at the FOMC meeting on 21 September. Last Friday, the spot rate hit the ceiling of the ±2% official band after UK’s mini-budget pummelled GBP/USD below 1.09. Apart from bolstering the USD’s haven status, the GBP crisis and USD/CNY trading above its 2019 highs above 7.20 probably motivated speculators to mistake China for losing control of its exchange rate.
Quote of the day
“It’s not the size of the dog in the fight, it’s the size of the dog in the fight.”
30 September in history
Germany and Russia agreed to partition in Poland in 1939.
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