FX Daily: Taking it slow on Friday

Moving from rally towards consolidation
Philip Wee22 Oct 2021
    Photo credit: Unsplash Photo

    DXY appreciated 0.2% to 93.8 after it found firm support at 93.5. S&P 500 rallied 0.3% to close at a new record high of 4,550 on another wave of strong US corporate earnings. The US 10-year treasury yield increased 4.4 bps to 1.701%, converging on the year’s highest close of 1.74% on 31 March. However, it is no longer simply about the Fed tapering asset purchases at its FOMC meeting on 3 November. The market is also betting on Fed hikes in late 2022. Since end-September, the 2-year treasury yield has increased 18bps to 0.455%. The implied yield for Fed Funds Futures expiring in December 2022 closed above 0.50% for the first time this year, above the 0-0.25% target range. Earlier this week, Fed Governor Christopher Waller warned that the Fed would need “a more aggressive policy response” if inflation remains stubbornly elevated next year. 

    On the other hand, the Fed’s Beige Book acknowledged that labor and supply shortages moderated US growth. Hence, investors might start pocketing some of this month’s gains. Despite a record high S&P 500, US stock market futures expect a weaker open on the last trading day of the week. The VIX stock market volatility has already returned to the lows in June-July and JPY crosses sold off on Thursday. The worst hit currencies were the commodity-led AUD, NZD and CAD which depreciated by 0.7%, 0.6% and 0.4% respectively. JPY strengthened by 0.3% to below 114 per USD for the first time since 14 October. Despite expectations for a BOE rate hike on 4 November, GBP’s rally hit a brick wall at 1.38 together with the FTSE 100 around 7200. Similarly, AUD and NZD failed to trade above 0.75 and 0.72 respectively.

    Not surprisingly, momentum flattened across Asian exchange rates too. In Southeast Asia, USD/MYR and USD/IDR were supported around 4.15 and 14100 respectively this week. USD/THB twirled around 33.4 while USD/VND flattened around 22,750 since early September. USD/PHP entered a new and higher trading range mostly between 50.5 and 51.0. USD/SGD was not far from the 1.34 support of the past four months when it rebounded to 1.370 yesterday. In Northeast Asia, USD/KRW might have found support around 1180 after it retreated from its peak at 1200. USD/CNY fell towards the year’s lows in June but did not deviate far from 6.40. In South Asia, USD/INR also pulled back to 74.5 after it revisited the year’s peak around 75.5.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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