USD

USD down again but huge event risk looms large

Chris Weston
Head of Research
26 Oct 2022

It's been another day of follow-through selling in the USD – the DXY has smashed through the 50-day MA and 4 Oct swing low, and it’s been a steady stream of dollar sellers – USDCNH remains the cross I look at to offer a central guide and as Chinese state banks reportedly sold USDs (to support the yuan) we’ve seen USDCNH trade 1.7% lower, where there would have no doubt been a decent stop run on the way – the China proxies have worked well, with NZD and AUD outperforming – there has been some love for the ‘Aussie’ on the big upside price in Q3 CPI, but Aussie rates pricing hasn’t warmed to the inflation print and we actually saw Aussie 3yr close -8bp – next week’s RBA meeting is pricing 28bp of hikes.

GBPUSD has caught client interest and while there has been focus on the pushback for the govt fiscal statement to 17 Nov, where Chancellor Hunt will reveal a £35b fiscal hole that needs to be plugged  – in some ways, this is less than some of the numbers flying around, and the market is already firmly of the belief that Hunt will detail spending cuts - notably towards defence – as well as sweeping tax hikes.

Certainly not as pronounced as AUDUSD, GBPUSD has still been traded one-way by the market and claimed the 1.16-handle – one for the momentum traders, with price closing firmly above the 4 Oct swing high and the upper Bollinger Band. Some focus on the 13 Sept high of 1.1737 as the next upside target.

(GBPUSD daily)

USDJPY longs have been liquidated and as we know the JPY – being the FX bond proxy – has found form as bond yields fall – a below consensus 50bp hike from the Bank of Canada has brought out the bond bulls and we can see a flatter curve, with US 10s eyeing a downside break of 4% – Friday will be a big day for USDJPY, not just because its BoJ day and that meeting could herald some key insights in the narrative – one can only imagine the broad market volatility if they signal sweeping changes to its YCC (Yield Curve Control) program – It’s unlikely, but the risk is not zero either.

It’s not just the BoJ meeting tomorrow, we also get the US Q3 Employment Cost Index (ECI) – the Fed look at this closely, so the market will too – consensus sits at 1.2%, and the USD bears will obviously want this lower - a scenario which would take USDJPY through the 22 Sept spike high of 145.90.

Having talked down the USD in recent notes, we still see one clear factor that gives the USD bulls hope – US Q3 earnings and the subsequent equity moves. Meta has been slammed after-hours, joining some highly disappointing numbers from Alphabet and Microsoft – Alphabet have been hammered and is testing huge support levels. The NAS100 is the weak link and we’re seeing sellers into the top of the recent range at 11,600 – the US500 though is holding on after the break out and this is where the USD should look more closely – a reversal back through 3809 should see USD inflow resume given its status as the default equity hedge, although the bond traders would be feeling a little more confident that Treasuries are starting to break away from equities.

In the session ahead it's all eyes on EUR and GER40 (or EU equity) exposures, with the ECB meeting at 23:15 AEDT / 13:15 BST. The market would be shocked if they didn’t hike by 75bp, but will the statement be hawkish enough to justify what’s priced through the EU rates curve? We see ‘terminal’ ECB pricing of 2.81%, so that is the yardstick – I will be watching EURUSD overnight implied volatility today to see how the market anticipates movement, which we can use as a guide to risk - will tweet it out later.

It leads me to consider next week’s event risk – there’s a lot!

Above all it’s a central bank bonanza:

  • FOMC meeting (3 Nov 5 am AEDT) – The Fed should hike by 75bp but there is a focus on opening the door to a slower pace of hikes
  • BoE meeting (3 Nov 23:00 AEDT) – The BoE hike by 75bp, with 100bp taken off the table - with the govt's fiscal statement pushed back, the BoE will refrain from doing anything too crazy
  • RBA meeting (1 Nov 14:30 AEDT) – a 25bp hike seems a lock – after the 3Q CPI print will they open the door to something larger in December? Does the AUD even care, or is it just a derivative of USDCNH and the Hang Seng?

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