Dollar softens as inflation cools and rate-hike bets fade
The greenback eased as US price data reinforced expectations the Fed holds next month.
We saw Treasuries bull steepen on further signs of moderating inflation, with PPI decelerating to 4.7% yoy from 5.5% prior, trimming odds of a September hike to ~35% as oil slipped ~2%. US equities rallied to fresh record highs on the softer print and lower crude, with the S&P 500 up 0.65% and Nasdaq up 0.8%; chipmakers led the tape while Cisco bucked the trend, falling 8.5%.
In Europe, bonds ground higher through the Norges Bank meeting, which held at 4.25% as expected while dropping its prior guidance for a further hike this year. Bunds closed 2.5bp richer and BTPs outperformed; regional equities were mostly softer. Gilts firmed ~2bp after the US data. UK Q2 GDP rose 0.4% as expected, down from 0.6% in Q1, though upside June services strength lifted the Q3 starting point.
NZ bonds held steady after softer inflation expectations spurred a local rally.
In Asia, the yen drifted toward 160 despite political backing for further BOJ tightening. Equities firmed in Japan and Korea but softened elsewhere; the Kospi rose 3.6% for a fourth straight gain and the Nikkei added 1.2%, while mainland China indices slipped.
In FX, AUD/USD was flat, while NZD/USD was down 0.14%.
In Asia, USD/SGD and USD/CNH were little changed.
Japan rate hike hopes lift yen
Japan’s government is reportedly backing a faster interest rate increase by the Bank of Japan, with the next move potentially coming in September or October, according to Bloomberg, citing people familiar with the matter. Concerns that a weaker yen could push up prices, together with the government’s aim to reinforce the impact of recent currency support measures, appear to be strengthening the case for an earlier move. The Prime Minister’s Office declined to comment on the report but said the Bank of Japan should continue working closely with the government to achieve its 2% inflation goal in a sustainable way.
In regional currencies, USD/SGD remains about 2% above its 28 January low of 1.2586. Initial resistance stands at the 100-day EMA (1.2843), followed by the 50-day EMA (1.2855). On the downside, 1.2750 remains an important support level. Buyers may look for opportunities on pullbacks while the pair stays above support. Elsewhere, SGD/JPY has climbed to its highest level in two weeks.
Aussie turns from two-month highs as markets digest RBA
The AUD/USD looks to be losing momentum after producing a short-term reversal signal on Wednesday, the grimly named “gravestone doji”.
Following this week’s Reserve Bank of Australia decision, another RBA rate hike appears increasingly unlikely. Monthly inflation has undershot market expectations for five consecutive months, with June trimmed mean inflation at 3.6%, below the RBA’s forecast of 3.8%.
Labour market conditions have also softened, with unemployment rising from 4.2% to 4.4% this year.
A cooling housing market may further deter additional tightening, given the RBA’s responsibility to support financial system stability alongside price stability and full employment.
Markets currently price in roughly a 66% chance of another rate hike over the next 12 months.
From here, support is seen at 0.7025, followed by 0.6925. On the upside, resistance is located at Wednesday’s two-month high of 0.7090.
USD below key psychological 100 level
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Calendar: 9 – 15 August
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
