Dollar firm but lacks momentum, FOMC hike expected

The dollar remains the week’s strongest as markets wait for the FOMC rate hike. Yet, the greenback is still held below last week’s high against most counterparties except the Loonie and Kiwi. The Swiss franc is also resilient as markets speculate on a bigger-than-expected rise by the SNB later on Thursday. Commodity currencies are generally weak on risk aversion while the yen is under pressure from rising major yields. Euro and British Pound are mixed for now.

Technically, USD/CAD’s breakout of the temporary high of 1.3343 overnight was a sign of a resumption of the Dollar’s rally. But further breakouts are needed to confirm the greenback’s strength. Immediate levels to watch are 144.98 resistance on USD/JPY, 1.1349 temporary low on GBP/USD and 0.6680 support on AUD/USD. A further level is the EUR/USD 0.9863 low.

In Asia, at the time of writing, the Nikkei is down -1.17%. Hong Kong’s HSI index is down -1.24%. China Shanghai SSE is down -0.04%. The Singapore Strait is up 0.06%. The Japanese 10-year JGB yield is down -0.0042 to 0.256. Overnight, the DOW fell -1.01%. The S&P 500 fell -1.13%. The NASDAQ fell -0.95%. The 10-year yield rose from 0.081 to 3.571.

AfDB cuts growth forecast for developing Asia to 4.3% and China to 3.3%

The Asian Development Bank has cut its growth forecast for developing Asia from 5.2% (April forecast) to 4.3% in 2022, and from 5.3% to 4.9% in 2023. She said: “The revised outlook is shaped by the slowing global economy, the fallout from Russia’s protracted invasion of Ukraine, more aggressive monetary tightening in advanced economies, and lockdowns resulting from the zero COVID policy of the People’s Republic of China.

As for China, growth forecasts have been revised down sharply from 5.0% to 3.3% in 2022, and from 4.8% to 4.5% in 2023. India were also revised downwards from 7.5% to 7.0% in 2022, and from 8.0% to 7.2% in 2023.

On the other hand, inflation forecasts have been raised from 3.7% to 4.5% in 2022, and from 3.1% to 4.0% in 2023, “due to the rise in energy prices and foodstuffs”.

BCE Lagarde: We will reassess whether a normalization strategy is sufficient

In a speechsaid ECB President Christine Lagarde referred to two considerations for monetary policy, the “destination” and the “pace” to get there.

As for the “destination”, she said, “as we move forward, we will reassess whether a normalization strategy is sufficient to get us back to 2% inflation over the medium term”, hinting that interest rates interest could enter a restrictive zone.

Meanwhile, the “appropriate pace of future rate increases will be decided on a meeting-by-meeting basis.”

RBA Bullock: interest rate not yet restrictive

RBA Deputy Governor Michele Bullock said the 2.35% interest rate was not yet restrictive. But the powerhouse was already looking for opportunities to slow the pace of tightening at some point. The monthly inflation data to be released next week would have a lot of statistical noise and probably wouldn’t have much impact on the deliberations at the October meeting.

Regarding the asset purchased under the pandemic bond purchase programme, Bullock said the RBA suffered a mark-to-market loss of A$33.9 billion in 2021/22. This would leave the central bank in a negative net equity position of AUD 12.4 billion. But she added that since it has the ability to create money, the Bank can continue to meet its obligations as they come due and therefore is not insolvent… The equity position negative will therefore not affect the ability of the Reserve Bank to do its job.

Fed to hike 75 basis points as 10-year yield resumes uptrend

The FOMC rate decision is the main focus of the day and another giant rate hike is expected. Based on current market prices, there is an 82% chance of a 75 basis point hike at 3.00-3.25% and only an 18% chance of a 100 basis point hike at 3.25-3.50%. Thus, the Fed has little chance of upsetting the markets.

The general rhetoric should remain unchanged, namely that the tightening should continue while the Fed is committed to bringing inflation back to its target. The biggest questions are about the new economic projections and the dot chart. Some hawkish surprise could be seen there, indicating a higher terminal rate for the current cycle and a longer period to stay there.

Here are some previews:

US 10-year yields rose a further 0.81 to close at 3.571 overnight, breaching the previous high at 3.483. The development confirmed the resumption of the uptrend from the 2020 low at 0.398. The next target will be a 61.8% projection of 1.343 to 3.483 from 2.525 to 3.847. A hawkish surprise in today’s FOMC projections could accelerate TNX’s path to that goal.

Somewhere else

The UK will release public sector net borrowing. The United States will also release existing home sales.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3272; (P) 1.3324; (R1) 1.3419; After…

The USD/CAD rally has resumed after brief consolidations and the intraday bias is back to the upside. The current uptrend should target the medium term Fibonacci level at 1.3650. On the downside, a break of 1.3225 minor support is needed to signal a near-term breach. Otherwise, the outlook will remain bullish on a pullback.

Overall downtrend from 1.4667 (2020 high) should have ended at 1.2005, after defending 1.2061 long term cluster support. The upside from there should aim for a 61.8% retracement from 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the preferred case as long as the support at 1.2716 holds.

Economic Indicators Update

GMT Ccy Events Real Provide Previous amended
00:30 USD Westpac Leading Index M/M August -0.10% -0.15%
06:00 GBP Public Sector Net Borrowing (GBP) August 7.5B 4.2B
14:00 USD Existing Home Sales August 4.70M 4.81M
2:30 p.m. USD crude oil inventories 2.4M
6:00 p.m. USD Fed interest rate decision 3.25% 2.50%
6:30 p.m. USD FOMC press conference

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