EUROPEAN FX UPDATE: Dollar marches ahead as EUR/USD dips under parity, but the JPY trims earlier losses

Analysis details (09:30)

DXY

A firm start to the week for the Buck as the index extends gains above 108.00, topping Friday’s 108.21 peak to a current 108.47 intraday best. The index is seemingly lifted by the risk-off sentiment coupled with losses in the EUR on Nord Stream 1 fears (more below). The early week bid also comes ahead of the Fed Jackson Hole Symposium set to kick off on Thursday. “The Fed is probably quite comfortable with what the market prices for its policy rate this year (around 125bp of hikes to a 3.50-3.75% target range.) What could be vulnerable to re-pricing higher would be the subsequent 40bp of easing priced in for the second half of next year.”, the desk at ING posit. From a technical perspective, the DXY sees the 12th and 13th July peaks at 108.56 and 108.59 respectively, before seeing the 17th July best at 108.72 followed by the YTD peak at 109.29. 

EUR, GBP

EUR/USD has again dipped under parity amid jitters over a potential supply disruption as Russia is to shut the Nord Stream 1 pipeline for three days from August 31st - Gazprom cited maintenance – with European gas futures rising by double-digit percentages this morning. Weekend ECB commentary from known hawk Nagel did little to stem the declines, with the GC member suggesting the central bank must keep raising rates even if the risk of a recession increases as inflation will remain too high otherwise; remarks which are in-fitting with Schnabel last week. ING suggests “Adding to the sell-off may well be the portfolio adjustments of Asian central banks. Asian FX remains under heavy pressure and will prompt intervention to sell dollars and support local currencies. Asian FX reserve managers will then need to sell EUR/USD to re-balance FX portfolios to benchmark weightings.” From a technical perspective, EUR/USD sees its current YTD trough at 0.9950 (14th July) with some also flagging the 20-week Bollinger bands at 0.9925 as potential support. Elsewhere GBP/USD succumbs to the broader Dollar strength and falls under 1.1800 whilst the UK braces for supply-chain impacts as workers at UK’s largest container port Felixstowe began an eight-day strike. EUR/GBP remains caged between its 100 DMA (0.8472) and 50 DMA (0.8497).

AUD, NZD, CAD

The Antipodeans are the relative outperformers but have waned off best levels amid the broader deterioration in sentiment. Nonetheless, NZD/USD remains at the top of the chart, buoyed by hawkish vibes from the RBNZ – with Deputy Governor Hawkesby suggesting there is ambiguity surrounding the Cash Rate peak whilst Richardson stated that recent strong domestic and inflation pressure was a surprise. AUD/USD has trimmed its gains but remains the second-best performer at the time of writing, with the overnight upside supported by its Kiwi counterpart, firmer base metals, and the PBoC LPR cuts. The Loonie conversely suffers a double whammy from the firmer Dollar and softer crude prices.

JPY, CNH, KRW

The JPY has climbed its way up the ranks amid a deterioration in sentiment having experienced mild losses in APAC trade owing to widening yield differentials alongside losses in broad APAC FX. USD/JPY slipped from a 137.43 APAC high to levels around 136.75 as the downside in stocks picked up in pace. Meanwhile, the CNH fell to its lowest level since September 2020 after the PBoC’s rate actions in which it cut the 1-Year LPR by 5bps to 3.65% and reduced the 5-Year LPR by 15bps to 4.30% vs expectations for a 10bps cut to both, while the extension of factory power cuts in Sichuan did not help sentiment in the Chinese currency. Elsewhere, the KRW fell to its lowest level against the buck since 2009.

TRY

The Lira remains on the backfoot amid the firmer DXY, with USD/TRY holding onto an 18.00 handle, whilst Turkey’s Central Bank revised rules for Lira government bond collateral for FX deposits in which it raised the RRR for credit from 20% to 30% for bond collateral.

22 Aug 2022 - 09:30- Research Sheet- Source: Newsquawk