EUROPEAN FX UPDATE: Yen folds, while Aussie holds amidst broad Buck bounce

Analysis details (10:22)

DXY/JPY

The Dollar and index recovered from the sharp post-US CPI reversal, and thanks in large part to the Yen’s demise on widening UST-JGB yield differentials as markets continue to shift hike expectations for this month’s FOMC meeting to 100 bp from 75 bp, and thereby factor in further divergence between Fed and BoJ policy rates. Indeed, Usd/Jpy rebounded from sub-137.50 through the midweek peak just shy of 138.00 before breaching that round number, 138.50 and 139.00 where 1.48 bn option expiry interest put up little resistance on the way to 139.39, thus far, and helping the DXY post a higher 2022/multi-year best, at 108.640 before strength in Yen crosses kicked to offer other basket components, like the Euro, some protection from the Greenback’s revival.

AUD

Cross flows were already underpinning the Aussie in wake of a stellar jobs report overnight, as Aud/Nzd climbed from around 1.1021 towards 1.1070, but Aud/Usd got another boost between 0.6730-88 parameters via more reports that China is thinking about lifting its ban on Australian coal imports due to Russian supply concerns. However, the headline pair faded into 0.6800 as the data prompted a tilt in RBA rate pricing from +50 bp to +75 bp, but still lagging behind the Fed by implication.

EUR/GBP/NZD/CHF/CAD

The Euro continues to defy gravity, if not logic, albeit with the assistance of upside in Eur/Jpy as alluded to above, with Eur/Usd fending off yet another test of parity even though Italy’s coalition Government faces a confidence vote that it is widely expected to lose. On that note, the Pound remained prone to external impulses awaiting the second vote in the Tory leadership contest, as Cable clung to the 1.1800 handle, while the Kiwi was flanked by decent option expiries either side of 0.6100 vs its US counterpart given 1.33 bn and 1.03 bn rolling off 0.6120 and between 0.6100-0.6090 respectively. Elsewhere, the Franc retreated through 0.9800 again within a 0.9776-0.9864 range and the Loonie lost its BoC edge against the backdrop of even steeper declines in crude prices, as Usd/Cad touched 1.3065 compared to a circa 1.2964 low.

SCANDI/EM

Relative resilience shown by the Sek and Nok given risk averse conditions and the former had hot Swedish inflation metrics to lean on, but the latter took advantage of a weaker Eur to offset the collapse in Brent. Conversely, the Cnh and Cny would not cope with Usd strength, the Sgd had to rely on the MAS to re-centre the policy band unexpectedly for protection and the Huf needed daily swap liquidity tenders from the NBH to keep its head afloat against the Eur.

14 Jul 2022 - 10:21- Fixed IncomeData- Source: Newsquawk