FX Daily: Taking a pause to reassess recent moves

Rallies in AUD, NZD and GBP near or hit resistances
Philip Wee20 Oct 2021
    Photo credit: Unsplash Photo

    DXY found support at 93.5 during the late European session and recovered to 93.8 by the end of the overnight session. Support for the USD came from a rebound in the US 10-year treasury yield from 1.567% to 1.637% around the same time. Strong US corporate earnings propelled S&P 500 for a fifth session by 0.7% to 4520 on Tuesday. With the index close to its record close of 4537 on 2 September, Fed officials were more concerned about high inflation over the medium-term than slower growth in the short-term. Fed Governor Christopher Waller warned that the Fed would need “a more aggressive policy response” if inflation becomes persistent instead of transitory next year. If the Fed’s Beige Book report today concurs with Waller, the market will need to reconsider if it was too quick in reining the USD after the second miss in the US nonfarm payrolls earlier this month.

    AUD appreciated to 0.7474 on Tuesday which effectively retraced last month’s sell-off to 0.7176 on 29 September. NZD did the same when it recovered from 0.6869 to 0.7154 during the same period. Both currencies are starting to look expensive. Their 14-day RSIs are close to the oversold 70 levels and have exceeded their last highs just before the September sell-off. According to our model, NZD’s upside appears more limited because it is near 2 standard deviations from its mean trend value than less than 1 standard deviation in the AUD. The Reserve Bank of New Zealand might push back against market expectations for an aggressive 50 bps rate hike at its next meeting on 24 November. Tomorrow, Reserve Bank of Australia Governor Philip Lowe will likely maintain the same dovish tone in yesterday’s October minutes. The critical psychological resistances remain at 0.75 and 0.72 for the AUD and NZD respectively. 

    GBP appreciated but failed to close above 1.3810 or its 100-day moving average. Tuesday’s high at 1.3835 was close to the ceiling of a descending price channel. The FTSE 100 index underperformed again and did not deviate far from the year’s high around 7200. The market has priced in two rate hikes that will take the Bank of England’s bank rate from 0.10% to 0.50% by end-year. However, the market is aware that the BOE monetary policy committee is divided between the doves and the hawks. Today, consensus is looking for UK CPI inflation to stay unchanged at 3.2% YoY in September, and core inflation to ease to 3.0% from 3.1% in August. Not quite the stampede to 4% by end-2021 expected by the central bank. Apart from potential rate hikes, investors are not looking forward to possible higher taxes at the upcoming Budget announcement on 27 October. Not surprisingly, the median forecast for UK’s 3Q growth by Bloomberg dropped sharply to 1.5% QoQ sa from 2.25% only a week ago.


    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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