EUROPEAN FX UPDATE: Dollar stays dominant as JPY and AUD approach YTD lows, with US players set to return from the long weekend

Analysis details (09:45)

DXY, CNH

• A firm start to the session for the Dollar index, fuelled by risk aversion and an overnight uptick in yields, and with US cash yields back online following its long Labor Day weekend. Risk aversion this morning largely emanates from the downbeat Chinese Caixin Services PMI which adds more gloom to the economic picture of the second-largest economy.


• To recap the data, Chinese Services PMI printed at 51.8 vs. Exp. 53.6 (Prev. 54.1) while the Composite came in at 51.7 (Prev. 51.9). “Overall, the manufacturing sector improved in August, the services sector grew at a slower pace, and there was still considerable downward pressure on the economy”, said the Senior Economist at Caixin Insight Group.


• From a technical standpoint, DXY topped 104.60 from a 104.10 intraday base, with the index eyeing multi-month highs. The next levels to the upside include the 31st May high at 104.70, the 16th May high at 104.74, and then the psychological 105.00 peak. USD/CNH rose from a 7.2716 low to levels north of 7.3000, irrespective of the firmer D/D PBoC yuan fix.


• Analysts at ING note that “the dollar’s outperformance in August was not entirely justified by market drivers (i.e. relative rates, equity, and commodity dynamics”, and the bank highlights that their short-term fair value model indicates the dollar is overvalued against all G10 currencies, “but recent price action suggests it will take some poor US activity data to prompt a USD correction. That may not happen this week, as developed market calendars are quite dry”, the desk says.

JPY

• The Yen is one of the focal points in today’s session as it approaches YTD lows against the Dollar. Overnight saw a particularly weak 10-year JGB auction which helped give a leg up to broader yields, with the JPY ultimately feeling headwinds from the UST-JGB yield differential as the former returns from its Labor Day weekend.


• Participants remain on intervention watch, whilst Japanese officials have not yet begun jawboning.


• In terms of technicals, USD/JPY topped 147.00 from a 146.41 base with the next level to the upside going back to the 7th November 2022 peak of 147.57.

AUD, NZD

• The Antipodeans sit as G10 underperformers as the fallout from the softer Chinese Services PMI takes its toll, while the RBA’s policy decision saw no fireworks.


• To recap, The RBA kept rates unchanged at 4.10%, as widely expected, in Governor Lowe's final meeting at the helm, while the central bank's rhetoric provided no surprises as it reiterated that some further tightening of monetary policy may be required and the Board remains resolute in its determination to return inflation to the target. AUD/USD experienced some two-way choppiness on the release before returning to preannounced levels, with the Aussie currency feeling more influence from the Chinese data.


• From a technical standpoint, AUD/USD fell from a 0.6465 high to a current low near 0.6370 as it threatened the YTD trough at 0.6364, with the next level to the downside the 0.6285 4th November low.

EUR, GBP, CHF

• The European majors succumb to the Dollar but to a lesser extent than their Antipodean counterparts. The morning saw the final PMIs in the EZ downgraded, with the broader theme being slower growth and rising input prices. The EZ-wide release suggested that there are signs employers are “moving towards job cuts sooner, not later.”. The release also highlighted that Germany and France led the declines, “where activity in the service sector weakened at the fastest rate this year.".


• Conversely, the UK Services PMI was revised higher but remained in contraction, with the accompanying commentary suggesting “latest survey data indicated another round of historically strong cost inflation across the service sector. This reflected rising salary payments, as well as higher fuel prices and elevated energy bills, according to survey respondents.” The release induced modest but fleeting GBP strength with EUR/GBP trimming some of its earlier gains at the time.


• Taking a look at technicals, EUR/USD slipped from a 1.0798 peak to levels under 1.0750, with the next level to the downside the 12th June low at 1.0733 and thereafter the 1.0700 psychological mark. GBP/USD eyes the lows from the 13th and 12th of June at 1.2499 and 1.2487 respectively after falling from a 1.2631 intraday peak. CHF is flat against the EUR but weaker vs the USD, with USD/CHF topping its 100 DMA at 0.8878 from a 0.8832 intraday base.

05 Sep 2023 - 09:50- Research Sheet- Source: Newsquawk