EUROPEAN FX UPDATE: Dollar undermines G10 peers, EUR balances hot CPI and NS1 jitters, whilst the Aussie holds onto China-induced gains

Analysis details (10:49)

DXY

A session of gains thus far for the index with upside spurred by haven bids, as the broader market sentiment deteriorated shortly after the European cash open. There were no notable catalysts for the downturn in the mood aside from positioning ahead of risk events alongside month-end dynamics. 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. Nonetheless, DXY found support at the psychological 108.50 – near its 10 DMA (108.54), and then made its way towards 109.00, with yesterday’s high at 109.11 ahead of the YTD peak at 109.48. Ahead, Fed’s Mester and Bostic are slated to speak, and in-between, the Chicago PMI will be released.

EUR, GBP

EUR/USD sits as one of the laggards with minimal immediate reaction seen in wake of hotter-than-expected August flash CPI for the EZ, which saw all metrics print above forecasts, although the upside for the pair may be capped by Nord Stream 1 jitters as Russia shut off the taps for three days. Heading into the announcement, markets assigned a circa 54% probability of a 75bps move at the September 8th meeting with around 160bps of tightening priced in by year-end. Post-announcement, little change was observed in market pricing. Yesterday, a myriad of ECB speakers hit the wires, including Lane, Vasle, Knot, Nagel, Muller, Stouranas, and Wunsch, who all essentially expressed concern over EZ inflation, whilst some left the discussion open on a 75bps hike next week. In terms of bank forecasts, Nordea and Danske Bank are now both calling for a 75bps increase – the former following the EZ CPI metrics. EUR/USD remains towards the bottom of a 0.9975-1.0045 parameter with yesterday’s low seen at 0.9912. The pair also eyes several large option expiries: 0.9925 (EUR 1.18bln), 1.0000 (EUR 1.6bln), 1.0035 (EUR 307mln), 1.0100 (EUR 1.8bln), 1.0150-60 (EUR 1.18bln). GBP/USD also sees some pressure from the Dollar, with GBP/USD languishing not far all yesterday’s 1.1619 trough after printing a 1.1693 peak overnight. EUR/GBP meanwhile found resistance right on yesterday’s high at 0.8604 before pulling back under the 0.8600 mark.

AUD, NZD

The antipodeans are mixed as AUD leads the gains as the outperforming G10 peer on the back of better-than-expected Chinese official PMI metrics – which in turn bolstered copper prices. AUD/USD tested resistance close to its 50 DMA (0.6904) before pulling back to levels closer to 0.6850. NZD is slightly softer on the day vs the USD and the AUD, with the AUD/NZD cross back on a 1.1200 handle.

CAD, NOK

Petro-currencies are softer as the slide in crude oil resumes. USD/CAD made its way above 1.3100 (vs low 1.3064) whilst NOK sees a double whammy from oil alongside the Norges Bank upping its foreign currency purchases. EUR/NOK topped its 21 DMA (9.8215) from a 9.7892 base before topping 9.9000.

JPY, CNY, EM

The JPY remains somewhat resilient in the face of the USD strength, likely amid the risk aversion across the market. USD/JPY remains under 139.00 in a 138.28-84 parameter. Over to the Yuan, the PBoC yet again opted for a firmer CNY fix, setting the mid-point at 6.8802 vs exp. 6.9076 (prev. 6.8698), whilst reports citing traders also suggested China's state-owned banks are seen selling US Dollars in the onshore spot market. Elsewhere, the Bank of Korea warned that the KRW weakness is due to CNY depreciation and a continued trade deficit.

31 Aug 2022 - 10:48- Research Sheet- Source: Newsquawk