Dollar steadies after big CPI-driven losses

Headlines

* Biden and China’s Xi meet in an effort to smooth tensions

* UK CPI falls to lowest level in two years, GBP underperforms

* Treasury yields rise despite producer prices biggest drop since 2020

* US stocks make modest gains after more encouraging inflation data

FX: USD consolidated Tuesday’s plunge with the dollar index finding support at the 100-day SMA is at 104.17. The 200-day SMA sits at 103.60. Retail sales were better than expected, showing some resilience. This feeds into the “soft landing” theme with yesterday’s benign price pressures. The Fib level (38.2%) of the July rally is at 104.38.  

EUR ignored softer industrial production data. The dollar is obviously the driver of the major, though the more defensive euro underperforming high-beta currencies. The sharp rally on Tuesday has hit the halfway point of the July drop at 1.0862. Support below could be the 100-day and 200-day SMAs around 1.08.

GBP sold off on weaker than expected CPI due to soft energy prices. The headline dropped to 4.6% from 6.7% and core to 5.7% from 6.1%. The downside surprise also got a boost from an undershoot in services inflation. The first rate cut in the UK is now seen in June next year. The 200-day SMA is at 1.2442. The 100-day SMA sits above at 1.2511.

USD/JPY turned around as 10-year US yields climbed above 4.5%. The major dipped to 150.04 before closing above 151.

AUD spiked to 0.6541 before closing in a zone of resistance/support. USD/CAD found support at the 50-day SMA at 1.3655. The Canadian economic outlook remains closely tied to the US. But progress on Canadian inflation is likely to be slower than the US so cuts could come earlier in the US.

Stocks: US equities edged up to a two-month high. The benchmark S&P 500 added 0.16% to settle at 4502. The tech-dominated Nasdaq finished 0.03% higher at 15,817. The Dow settled 0.47% higher at 34,991. Nvidia finished lower, ending a 10-day win streak. The stock has climbed over 20% during its latest rally adding over $200bn in market value. The retailer Target jumped over 17% after it beat earnings estimates on inventory management.

Asian futures are mixed. APAC stocks rose on Wednesday as China stepped up economic stimulus via the biggest cash injection into the system since 2016. Better than expected Chinese data helped sentiment. India stocks posted their best day in seven months.

Gold tried to push higher until bond yields advanced higher. The 200-day SMA should be good support at $1936, along with the short-term Fib level of the October rally at $1933.

Day Ahead – Australia Jobs

October employment is expected at 24,000 while the jobless rate is seen ticking one-tenth higher to 3.7%. In the RBA’s latest SoMP, the bank downgraded its unemployment rate forecast across the horizon period, while for December, the projection was cut to 3.75% from 4%. Conditions in the labour market were seen to be gradually easing, but they remain tight. Employment growth has slowed from its strong pace late last year. Firms have been adjusting the hours worked due to easing demand growth in the economy.

Elsewhere, we get US weekly initial jobless claims. These are likely to remain low and suggest that the labour market is still relatively tight. Markets are now asking the question about Fed rate cuts, convinced that their tightening cycle is now done.

Chart of the Day – AUD/USD breaks higher

The greenback might now shift to a “sell USD rallies” theme in contrast to the “buy USD dips” we have seen since the middle of the year. At least the risk of a government shutdown at the end of this week is fading. The aussie has benefitted from the cut in Fed rate expectations, along with other high-beta, cyclical currencies. Fresh Chinese liquidity, better Chinese activity data and firming metals pricing are also helping AUD.

There is a resistance/support zone just above 0.65. Previous August, September and November highs sit around here, plus a major Fib level (38.2%) of the July decline. The 50% mark is at 0.6584 with the 200-day SMA above. The 100-day SMA resides just below at 0.6490.