EUROPEAN FX UPDATE: USD and JPY outperform and Antipodeans lag as risk aversion engulfs markets

Analysis details (09:35)

DXY

• The broader Dollar and index are firmer in the European morning, propped up by the risk aversion seen across the market after Fitch downgraded US long-term ratings to 'AA+' from 'AAA', with a stable outlook. Meanwhile, Fed’s Bostic (2024-voter) suggested he sees no rate cuts until H2 2024 (vs market pricing for the first cut in May 2024).


• Back to Fitch, the rating agency cited increasing debt, weak governance, and anticipated fiscal decline over 3 years, leading to debt standoffs. Goldman Sachs said the downgrade mainly reflects governance and medium-term fiscal challenges but does not reflect new fiscal information, adding that the move should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change (Full Newsquawk analysis available here).


• In terms of technicals, DXY found an overnight base around 102.00 and trades within a 102.01-26 European range thus far, with upside levels including the 100 DMA (102.35), yesterday’s high (102.43), then the 50 DMA (102.45). Downside levels include the lows set on Monday and Tuesday this week, both at 101.84.


• Ahead, participants will be eyeing the US ADP National Employment ahead of the BLS jobs report on Friday. Today will also see the US refunding announcement after financing estimates were revised upward on Monday.

JPY

• The JPY is the current G10 outperformer following three consecutive sessions of losses in the aftermath of the BoJ’s decision last Friday, with potential tailwinds seen from the broader risk-off sentiment across markets.


• Overnight, BoJ Deputy Governor Uchida maintained a dovish stance and suggested Japan is now at a phase where it is important to patiently maintain easy policy. Uchida said last week's decision was a pre-emptive step at continuing monetary easing without disruptions and the BoJ must fine-tune YCC at times and make the policy more flexible. Furthermore, outdated BoJ minutes were released (from two meetings ago) but are ultimately stale given the BoJ’s back-door YCC tweak last week.


• USD/JPY briefly dipped under 142.50 from a 143.35 high with yesterday’s low the nearest obvious support level at 142.19, while yesterday’s high resides at 143.54. EUR/JPY hovers just above 156.50 in a 157.49-156.51 range and with the 21 DMA at 155.86. GBP/JPY sees a similar story with its 21 DMA at 181.61. AUD/JPY meanwhile falls back towards Monday’s 93.64 low from a 94.90 overnight peak.

AUD, NZD

• Once again the marked laggards amid the broader risk tone, hangover from the RBA hold, and overall bearish Kiwi jobs data overnight.


• NZD lags in the G10 space after New Zealand Q2 unemployment rose more than expected (3.6% vs exp. 3.5%, prev. 3.4%), while the Labour Cost Index mixed expectations on both QQ and YY terms – which could provide the RBNZ with some comfort ahead of the 16th August decision.


• Analysts at ING say “The quite outdated labour statistics released overnight moved in the right direction and allow the RBNZ to keep its messaging unchanged at the August meeting. However, we continue to see risks the Bank is underestimating the domestic inflation risks and markets are underestimating the risks of another hike before year-end.”


• AUD/USD slipped overnight after taking out a triple-weekly bottom around the 0.6595-0.6600 area and dipped under the low seen on the 6th of June (0.6565) with a current intraday low of 0.6563, with the next level to the downside being 0.6500 which roughly aligns with the 30th May high at 0.6501.


• NZD/USD dipped under 0.6100 from a 0.6169 high, falling under its 50 DMA (0.6164) in the process, with the next downside level the 30th June low at 0.6057.

EUR, GBP

• EUR and GBP are resilient to the Dollar’s strength despite a lack of headlines, data, and broader risk aversion.


• GBP/USD tilts firmer in the run-up to the Bank of England confab tomorrow whereby the MPC is expected to hike rates by 25bps (vs. prev. 50bps increase), bringing the Base Rate to 5.25%, as forecast by 42/62 economists surveyed by Reuters (Full Newsquawk preview available in the Research Suite).


• EUR/USD trades flat in a 1.0977-1019 intraday parameter thus far while GBP/USD hovers just under 1.2800 in a 1.2761-2805 band. EUR/GBP fell from a 0.8785 high and briefly dipped under its 50 DMA (0.8589) ahead of its 21 DMA (0.8580)

BRL

• There is speculation the BCB will start its easing cycle today. Desks suggest with significant fiscal reforms passed, a notable decline in inflation, and inflation expectations nearing BCB's target around 3.50%, the bank appears ready to make a credible rate reduction.


• The market's main question is whether BCB will commence the cycle with a 25bp or 50bp cut. Interest rates markets already price almost 500bp of easing over the next year.

02 Aug 2023 - 09:39- ForexEU Research- Source: Newsquawk