Bond Yields Extend Rise Ahead of US CPI Report, DXY Climbs

Michael Moran, Senior Currency Strategist at ACY

09.02.2022 05:15 pm

#stocks

The Australian Dollar outperformed its peers boosted by a rise in base metals, while equities rose. At the close of trade in New York, the AUD/USD pair settled at 0.7141, up from 0.7075 on Monday. Meantime the DXY (Dollar Index), a popular gauge of the Greenback’s value against a basket of 6 major currencies, climbed 0.2% to 95.60 (95.47 Monday). Ahead of Thursday’s US CPI report, global bond yields continued their march higher. The benchmark US 10-year Treasury Yield extended its rise to 1.96%, 5 basis points higher than its Monday finish (1.91%). Other global bond yields followed with Germany’s 10-year bond rate climbing 6 basis points to 0.26%. Australia’s 10-year Treasury yield soared a whopping 16 basis points to 2.12% after a former RBA official said the Australian central bank could hike interest rates four times this year. Against the yield sensitive Japanese Yen, the Greenback (USD/JPY) advanced 0.40% to 115.57 (115.20 yesterday). Data released yesterday saw Japanese economic data mostly miss estimates. The Euro (EUR/USD) dipped to 1.1418 from 1.1440. Sterling (GBP/USD) eased to 1.3544 from 1.3560 ahead of Friday’s release of UK GDP. The Kiwi (NZD/USD), buoyed by strong resource prices and a robust Aussie Dollar, was up at 0.6645 (0.6615). Against the Canadian Loonie, the Greenback (USD/CAD) soared 0.53% to 1.2765 after Canada’s trade balance slid into a deficit from a previous surplus. Asian and Emerging Market currencies were mixed against the US Dollar. The USD/CNH pair rallied to 6.3680 from 6.3635 while USD/THB (Dollar-Thai Baht) slipped to 32.90 from 33.05 on late Tuesday. Against the Singapore Dollar, the Greenback (USD/SGD) edged up to 1.3455 (1.3440).
Wall Street stocks managed to finish with gains in subdued trade ahead of Friday’s US CPI report.
The DOW rallied to 35,425 (35,060) while the S&P 500 settled 0.55% higher to 4,515 (4,495).
Risk sentiment was mixed as the Russia-Ukraine standoff clouded the horizon for the global economy.
Data released yesterday saw Japan’s Household Spending (y/y) in January fall to -0.2%, lower than estimates of 0.0%. Japan’s Current Account slipped to +JPY 0.79 trillion from a previous +JPY 1.37 trillion, missing median forecasts at +JPY 1.16 trillion. Bank Lending in Japan dipped 0.6%, against expectations of 0.8%. The Japanese Economic Watchers Sentiment Index fell to 37.9 from a previous 56.4, missing estimates at 48.1 Australia’s National Australia Bank’s Business Confidence Index rose to 3 from a previous -12. France’s Trade Deficit climbed to -EUR 11.3 billion from a previous -EUR 9.8 billion, missing forecasts at -EUR 9.1 billion. The US January Trade Deficit eased to -USD 80.7 billion from December’s -USD 79.3 billion, and better than economist’s forecasts at -USD 83.0 billion. Canada’s Trade Balance slid into a deficit of -CAD 0.1 billion, against forecasts of a Surplus of +CAD 2.5 billion. The US IBD/TIPP Economic Optimism Index slipped to 44.0 from 44.7.

AUD/USD – The Aussie Battler bounced back in true Battler fashion to finish at 0.7075 from 0.7035 as shorts scrambled for cover. Overnight the Australian Dollar hopped to a high at 0.7152 before easing in late New York. A rise in risk appetite buoyed the Aussie against its other peers. The AUD/JPY cross was up 0.60% to 82.50 (82.00 yesterday).
USD/JPY – a rise in the benchmark US 10-year bond yield by 5 basis points lifted the US Dollar against the yield sensitive Yen. The USD/JPY pair soared to an overnight peak at 115.63 from yesterday’s open at 115.05. The Greenback opens at 115.55 in Asia.
EUR/USD – the Euro eased to 1.1418 from 1.1440 yesterday following its strong rally late last week. Overnight the EUR/USD traded to a high at 1.1449 before easing to its New York close. The shared currency held above the 1.1400 threshold level despite broad-based US Dollar strength following ECB President Lagarde’s hawkish rhetoric last week.
GBP/USD – Sterling eased to a 1.3544 close from yesterday’s 1.3560. Overnight the British currency traded to a low at 1.3508. Last week the BOE hiked interest rates 0.25%, which was widely expected, although some had anticipated a rise of 0.50%. Traders are now setting their sites on Friday’s release of UK GDP.

On the Lookout: While today’s economic calendar is light, speeches by the Bank of Canada’s Governor Tiff Macklem and Fed FOMC member Loretta Mester could stir up FX. Both are scheduled to speak early tomorrow morning Sydney time. Australia kicks off with its Westpac Consumer Sentiment (no f/c, previous was -2.0%). Although this isn’t a major number, a bigger drop could reverse the Aussie’s gain. While a smaller fall could spark further short covering in the AUD/USD pair. New Zealand follows with its quarterly Inflation Expectations (no f/c, previous was 2.96%). Japan releases its January Machine Tool Orders (y/y no f/c, previous was 40.5%. Germany starts off Europe with its December Trade Surplus (f/c +EUR 10.4 billion from a previous +EUR 10.9 billion). Germany’s Imports in December are forecast to fall to -1.5% from 3.3%, while December Exports are expected to have fallen to -0.2% from 1.7%. Watch for any surprises in this number too. Germany also releases its Current Account for December (f/c +EUR 24.5 billion from previous +EUR 18.9 billion). Italy releases its December Industrial Production (m/m f/c -0.7% from 1.9%; y/y f/c 5% from 6.3%). The US rounds up today’s data releases with its December Wholesale Inventories (f/c 2.1% from a previous 2.1%).

Trading Perspective: While the US Dollar finished mixed, the DXY (Dollar Index) retained its overall strength. Only the Aussie, Kiwi and some Emerging Market Currencies finished with gains versus the Greenback. Today we can expect more of the same heading into Friday’s crucial US CPI report. Watch for comments from the BOC’s Macklem and FOMC member Mester. The market’s focus has turned to inflation while the Covid-19 Omicron variant, still a concern, has been pushed to the sidelines. Traders will be looking into any rhetoric from global central bankers on interest rate expectations. Meantime, we have had formed some good trading ranges in the currencies. The best tactic for now as an FX trader is to trade these ranges. Bear in mind, that the Greenback will remain supported heading into Friday.

AUD/USD – The Battler’s gains have been impressive considering the bearish sentiment that weighed on the AUD/USD pair last week. For today, immediate resistance lies at 0.7145 followed by 0.7175 and 0.7205. On the downside, we can find immediate support at 0.7100, 0.7070 and 0.7040. For today we can expect the Aussie to trade a likely range of 0.7080-0.7150. Keep nimble, we are in for some choppy trade in this puppy. Prefer to sell rallies into the 0.7150 area.

(Source: Finlogix.com)

EUR/USD – while the Euro dipped 0.20% to 1.1418 from 1.1440 yesterday, it managed to finish above the 1.1400 support level. Overnight low traded was at 1.1396. On the day, immediate support lies at 1.1400 followed by 1.1370. Immediate resistance can be found at 1.1450 and 1.1480. Look for consolidation in a likely trading range today of 1.1385-1.1445. The preference is to sell rallies.
USD/JPY – the Dollar grinded higher against the Yen to finish at 115.57 against 115.20 yesterday. Overnight high traded was at 115.63. The USD/JPY pair was buoyed by the higher US 10-year bond yield which climbed 5 basis points. In contrast, Japan’s 10-year JGB yield was up 2 basis points to 0.21%. This will keep the USD/JPY pair supported. Immediate resistance today lies at 115.65 followed by 115.90. Immediate support can be found at 115.20, 114.90 and 114.60. Looking to trade a range today between 115.00-115.70. Up at these levels, prefer to sell USD/JPY rallies. We could see a corrective move lower first.
GBP/USD – Sterling eased against the Greenback to 1.3544 from 1.3560 after choppy overnight trade between 1.3508 and 1.3564. For today, immediate resistance can be found at 1.3565 followed by 1.3595 and 1.3615. Immediate support lies at 1.3520, 1.3500 and 1.3470. Traders will be focussed on the US inflation and UK GDP reports both released on Friday. On the political front, UK Prime Minister Boris Johnson announced a reshuffle but has refused to apologise over the Partygate storm which has dominated British headlines. This will continue to be a barrier to the GBP/USD pair. Look to sell rallies in a likely range today of 1.3485-1.3565.

Have a good Wednesday ahead all. Happy trading.

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