EUROPEAN FX UPDATE: Dollar dominates as APAC traders took DXY to a fresh YTD peak post-Powell

Analysis details (09:53)

DXY, Yuan

The index printed a fresh YTD (and near-20yr) peak just shy of 109.50 overnight as APAC players had their first chance to react to hawkish central bank commentary from Jackson Hole on Friday and Saturday. The index marched to a 109.48 high (from a 109.09 low) before the European open and thereafter waned off best levels but remains on the firmer side of its intraday range at the time of writing. The week is scattered with risk events which include US NFP, and ISM PMIs, alongside influence from month-end rebalancing. In terms of month-end models, Citi’s month-end FX model points to EUR buying and JPY selling while Morgan Stanley’s models point to USD selling vs G10s ex-CHF. In terms of upside levels, September 22nd 2002 high sits at 109.67 ahead of the June 23rd 2002 peak at 111.13, whilst downside levels see Friday’s high at 108.87. Overnight, the weakening Yuan grabbed attention alongside disappointing Chinese Industrial Profits, with USD/CNH topping 6.9000 before finding some resistance at around 6.9300. Analysts at Goldman Sachs upped their forecasts and have joined the call for USD/CNY to hit 7.000 (prev. 6.7500) over the next three months citing a slowing economy. The bank sees USD/CNY 6.8500 (6.6000) in six months and 6.7000 (6.5000) in a year.

EUR, GBP

Both are under pressure from the Dollar but to varying degrees. EUR/USD languishes just under 0.9950 in a current 0.9915-69 daily parameter and is not far off the YTD trough at 0.9899. GBP/USD is also impacted with the pair extending on losses under 1.1700 to a current low of 1.1649, with technicians now setting sights on the March 2020 low at 1.1404. EUR/GBP meanwhile has been extending on gains and has topped 0.8500 (vs low 0.8489), with a string of hawkish ECB updates since the European close on Friday keeping the EUR propped up vs non-Dollar peers. To recap, ECB hawks Knot, Holzmann, and Kazaks floated a potential 75bps hike next week, whilst Villeroy said a "significant" rate hike is needed, whilst Bloomberg sources suggested some ECB officials want quantitative tightening (QT) talks in 2022, but the Governing Council hasn't discussed QT yet. As a reminder, today is a UK bank holiday – markets are likely to see reduced trading volumes and liquidity during the European session.

AUD, NZD, CAD

Again, all softer against the USD to varying degrees. CAD sees the narrowest losses as the crude complex remains supported. NZD/USD threatens a breach of 0.6100 to the downside (vs high of 0.6135). Meanwhile, AUD bears the brunt of risk aversion and softer base metal prices in China. AUD/USD sees its next support at exactly 0.6800 –psychological support that also marks the 19th July low.

JPY, CHF

The JPY is the current G10 laggard despite the broad risk aversion and amid the widening FOMC-BoJ pricing. USD/JPY tested 139.00 to the upside as it eyes its YTD peak at 139.39 – printed on 14th July. Meanwhile, EUR/CHF is flat around its 10 DMA (0.9630). SNB’s Chairman Jordan over the weekend said there is no need to adjust the definition of price stability or broaden SNB’s mandate, while he added they are prepared to act decisively if price stability is at threat and that unconventional monetary policy instruments are likely to continue to have an important part to play in Switzerland.

29 Aug 2022 - 09:53- - Source: Newsquawk