FX Daily: USD is higher, so is caution

DXY is near our 96 target ahead of schedule; profit-taking possible ahead of Thanksgiving.
Philip Wee17 Nov 2021
    Photo credit: Unsplash Photo

    USD has exceeded our expectations; DXY is within striking distance of our forecast of 96 set for 1Q22. DXY was lifted in the overnight session by its weakest components i.e., the negative-yielding currencies led by JPY (-0.6%), CHF (-0.5%) and EUR (0.4%). The European Central Bank and the Bank of Japan continued to emphasize that their countries are on a different inflation and monetary policy trajectory from the US. CAD did not benefit from the Bank of Canada’s warning that was “getting closer” to rate hikes. Instead, the loonie depreciated by 0.3%, dragged down by its weaker commodity peers, the AUD (-0.6%) and NZD (-0.8%). However, GBP managed to appreciate 0.1% from Bank of England Governor Andrew Bailey’s uneasiness over rising inflation.

    USD was also lifted by Wall Street; Dow, S&P 500 and Nasdaq Composite rose 0.2%, 0.4% and 0.8% respectively. US consumers continued to spend despite worries over high inflation. Advance retail sales increased 1.7% MoM in October; consensus had expected a smaller rise of 1.4% from 0.8% (revised up from 0.7%) in September. US large retailers reported stronger-than-expected earnings on home improvement spending (where customers were paying more instead buying more) and the stocking up of groceries by households feeling the pressure from rising prices. Capacity utilization also beat expectations with an increase to 76.4% (vs 75.9% consensus) in October from 75.2% a month earlier. The NAHB Housing Index improved a third month to 83 in November from 80 in October. Against better US economic prospects for 4Q, the US Treasury yield curve steepened to 111.6 bps from 109.8 bps. Compared to recent sessions, the rise in yields were muted at 1.9 bps to 1.634% for the 10Y and a smaller 0.2 bps increase to 0.518% for the 2Y.

    We remain wary of the DXY’s major resistance around 96.1 or its 50% Fibonacci retracement level. Profit-taking might set in ahead of the US Thanksgiving holidays next week (25 November). On Friday, Fed Vice Chair Richard Clarida will discuss global monetary policy coordination, cooperation and collaboration at a virtual event hosted by the San Francisco Fed. Bundesbank President Jens Weidmann might join other German voices in opposing the ECB’s loose monetary policy and stance. Apart from St Louis Fed President James Bullard urging the Fed to step up monetary policy normalization to manage inflation risks, other Fed officials pushed back against rate hike expectations. Richmond Fed President Richard Barkin favored patience and wants more data on inflation and jobs before a decision on rate hikes. San Francisco Fed President Mary Daly argued that pre-emptive rate hikes would not ease the supply-chain issues fanning inflation pressures. President Joe Biden will decide on the Fed Chair in the next four days, whether to reappoint Jerome Powell or replace him with Lael Brainard. US Treasury Secretary Janet Yellen favours continuity to avoid politicizing the Fed.

    Several developments suggest that oil prices may correct more from their 7-year highs. The International Energy Agency’s October monthly report noted that supply is catching up with demand as US drillers recover from the hurricanes and ramp up oil production e.g., oil barrels coming out of the largest oil field in the Permian Basin are set to exceed pre-pandemic highs this December. US President Joe Biden also asked Chinese President Xi Jinping to join in releasing crude oil reserves to stabilize prices during their virtual summit this week. OPEC reported that the global oil market is set to flip from being under-supplied to a surplus in early December. WTI crude oil prices held around USD82.22/barrel on Tuesday but remained below its peak of USD86.4 on 26 October.

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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