EUROPEAN FX UPDATE: Dollar deflated ahead of US inflation data

Analysis details (10:21)

DXY

Plenty of potential grounds for the Greenback’s latest downturn, like caution heading into US CPI in case the price metrics miss consensus and add credence to the inflation may have peaked theory, while Treasury yields continue to retreat and the curve re-flatten. However, other global bonds are also correcting and retracing further from bear market territory so rate differentials are not that negative or less favourable for the Buck and its loss of momentum could be more technical in nature after another test of key upside levels, but no breaches or clean breaks. Moreover, the index got very close to the psychological 104.000 mark only yesterday with the aid of Fed’s Mester bringing the notion of 75 bp hikes back to the table for H2 this year, if inflation is not behaving itself by then. Indeed, after falling narrowly short and therefore failing to revisit or better Monday’s y-t-d and multi-year apex at 104.190, the DXY slipped back into a 103.960-370 band.

AUD/NZD

The Aussie is drawing impetus from external factors, like a recovery in iron ore and other commodities amidst better news from China on the Covid situation, not to mention stronger than expected Chinese CPI and PPI data, as Aud/Usd nudges 0.7000 again irrespective of a marked decline in Westpac consumer sentiment. Conversely, the Kiwi has some domestic incentive to rebound through 0.6300 vs its US counterpart given confirmation from NZ PM Adern overnight that international borders will fully re-open as of July 31.

CHF/JPY

For the Franc and Yen, relief comes mainly via the much more buoyant and friendly debt environment as the last major currencies existing under ultra-accommodative Central Bank policies. Hence, Usd/Chf has reversed towards 0.9900 from circa 0.9975 on Tuesday and Usd/Jpy is probing 130.00 compared to the new 2022/post-2002 peak around 131.25 posted on May 9. 

CAD/GBP/EUR

Also benefiting from their US peer’s pull-back, with the Loonie and Pound underpinned by a bounce in oil as well, while the Euro is propped amidst more hawkish-leaning ECB guidance, including remarks from President Lagarde that chime with a July rate hike as she omitted the word ‘months’ from a reference to ‘some time’ in context of the gap between APP ending and tightening. In fact, she stated that she has been very clear that the period between stopping QE and hiking could amount to only a few weeks. Usd/Cad retreated through 1.3000 where 1.7 bn option expiries reside and not far from 1.9 bn interest at the 1.2950 strike, while Sterling secured a tighter grip of the 1.2300 handle and Eur/Usd reached 1.0575.

SCANDI/EM

Brent’s revival to top Usd 106/brl from Usd 101.30 at worst alongside WTI roaring back from Usd 98.20 to Usd 103.35 definitely came to the aid of the ailing Nok, while the Sek gleaned support from a sharp spike in Swedish money market inflation expectations for CPIF 1 year ahead and the Cnh/Cnh were boosted by the aforementioned hot Chinese inflation prints. In contrast, Conversely, little joy for the Try following the CBRT’s decision to cut its RRR for Turkish finance firms to zero percent until Friday or the Czk when serial unchanged CNB dissenter Michl was appointed as head and Czech President Zemen said he does not wish to see a large decrease in interest rates, but does not see a reason for additional increases, adding that rates are ceasing to be an inflation breaker. Elsewhere, the BNM hiked its key rate by 25 bp, as expected, with the floor and ceiling also lifted to maintain the corridor and the BoT talked about timely adjustments towards tightening.

11 May 2022 - 10:21- Fixed IncomeData- Source: Newsquawk