The Fed’s taper timeline is approaching; US yields, dollar extends gains


Risk-Off in Asia on Evergrande China, low resources

Summary: The Dollar Index (USD / DXY), a popular indicator of the value of the greenback against a basket of 6 major currencies, extended its gains, climbing 0.39% to close at 93.20 (92.85) . Yields on US Treasury bonds rose on Friday ahead of this week’s Federal Reserve policy meeting. Speculation that the Fed will change its policy sooner rather than later has grown following strong US retail sales results last Thursday. The yield on benchmark 10-year US Treasury bonds climbed 2 basis points to 1.36%. The euro fell 0.38% to 1.1725 after breaking through strong support at 1.1750 (1.1770 Friday). The British pound slipped to 1.3730 (1.3795) on lower UK retail sales and an overall stronger greenback. The Aussie fell to 0.7265 (0.7295) as iron ore prices continued their decline.

Against the yen, the dollar climbed to 110.00 (109.75), supported by rising US yields. The dollar ended up stronger against all Asian and emerging market currencies. USD / CNH closed at 6.4700 (6.4600 Friday). Against the Thai baht, the greenback climbed to 33.30 from 33.10. In early Asia, there was risk from the start as speculation grew that Chinese real estate developer Evergrande was on the verge of default. Elsewhere, Canada’s latest federal election results saw the contest too close to be announced. Whatever the outcome, no Canadian candidate should change the current policy. The USD / CAD pair stabilized 0.37% at 1.2770 (1.2685) on Friday.
Wall Street shares closed lower. The DOW slipped to 34,480 (34,730). The S&P 500 finished at 4,417 from 4,470 on Friday. Other global bond yields rose following the lead of their US counterparts. The 10-year German Bund rate closed at -0.28% (-0.30%). The yield on the UK 10-year Treasury was 0.84% ​​(0.82%). Japanese 10-year JGB bond yields were unchanged at 0.00%.
Data released on Friday saw UK retail sales in August collapse to -0.9%, beating the median forecast at 0.5%. The euro area’s July current account surplus eased to + € 21.6 billion against a median forecast of + € 25.9 billion. The euro area annual CPI and core CPI in August were as expected at 3.0% and 1.6% respectively. US Preliminary University of Michigan Preliminary consumer sentiment rose to 71.0 from 70.3 previously, but lower than expected at 71.9.

  • EUR / USD – the split currency extended its decline to 1.1725 from 1.1768. EUR / USD broke through the late August support level at 1.1750 in New York trading. The euro traded overnight high was 1.1789.
  • AUD / USD – sliding away. After last week’s dismal Australian jobs report, the Aussie Battler extended its decline. Iron ore prices continued to decline, weighing on the Australian currency. AUD / USD closed at 0.7262, down 0.52%. The overnight low traded was 0.7253.
  • USD / CAD – against the canadian loonie, the greenback climbed 0.37% to 1.2770 (1.2685). Tight competition in the Canadian general election had no impact on the loonie. A victory for either party is not considered a risk because economic and monetary policy will not change. The sentiment of risk aversion and the generalized strength of the dollar were the dominant factors for the loonie.
  • GBP / USD – The British pound slipped to 1.3730 from 1.3792 following a drop in UK retail sales in August, more than most analysts had expected. GBP / USD hit an overnight low of 1.3674 before settling higher at the end of New York.

On the lookout: Asian trade will be slow today due to the holidays in Japan and China. Today’s economic data schedule is light. New Zealand’s August Services PSI drops to 35.6 from 55.9 previously (ACY Finogix). No predictions were given. Europe kicks off with the UK Rightmove monthly house price index for September (no f / c given, previous was -0.3%). The German PPI for August follows (m / mf / c 0.8% vs. 0.9%, y / yf / c 11.4% vs. 10.4% – ACY Finlogix). There is no release of significant economic data in North America.
Markets are focused on the results of the Fed’s meeting and press conference (early Thursday 23 September in Sydney). Speculation is growing as to whether the Federal Reserve will announce (or not) a formal reduction in its bond purchases. Other central banks with monetary policy meetings this week are the Bank of Japan (Wednesday), the Swiss National Bank and the Bank of England (Thursday). None of these central banks should change their policy.

Commercial perspective: The dollar held its global bid against rivals on speculation of a Fed announcement of cutbacks and a general risk aversion tone. Developments regarding Chinese property developer Evergrande will be closely watched. In the current environment, expect the greenback to remain long. The potential damage to risky currencies is high and the Australian dollar, the currency of China’s largest trading partner, is likely to fall further. We can expect China Inc to step in to slow any damage to Evergrande. Ultimately, the effects on the Chinese economy will be felt and seen.
Iron ore prices have fallen nearly 12% this month.

  • AUD / USD – The Battler remains under pressure but is holding up this morning. The Aussie closed in New York at 0.7265. In Asian trade, the Aussie traded at a low of 0.7257. The Aussie’s immediate support is at 0.7250 followed by 0.7220. Immediate resistance can be found at 0.7290 followed by 0.7320. Expect the Aussie to drift lower at first. Probable range today 0.7220-0.7290. Looking to swap the lineup. The Aussie is trading heavily but the specs are short …
  • EUR / USD – extended its decline to 1.1725 from 1.1768 on Friday. The shared currency fell under the weight of the overall stronger greenback. There were no major data releases on Friday. This week, the euro will take a cue from the US dollar with the midweek FOMC meeting to set the tone. The euro has immediate support at 1.1720 (overnight low). The next level of support is found at 1.1695 and 1.1665. Immediate resistance stands at 1.1740 and 1.1780 (strong). Expect the euro to consolidate in a likely range of 1.1700-60.
  • GBP / USD – The British pound fell to 1.3730 at the New York close, down 0.9% from 1.3792 on Friday. The pound was under pressure in Europe after the disappointing UK retail sales report was released. Overnight GBP / USD traded low at 1.3720 where immediate support is found. The next level of support is found at 1.3690. Immediate resistance for the day is at 1.3755 followed by 1.3775 and 1.3800. Look for a consolidation in a probable trading range today of 1.3710-1.3780.
  • USD / CAD – Against the Canadian loonie, the US dollar finished near its overnight highs at 1.2770. Immediate resistance is at 1.2770 followed by 1.2810. The overnight low traded for USD / CAD was at 1.2725. Immediate support for the day is at 1.2740 followed by 1.2720. USD / CAD remains an offer on the possibility of a Fed tantrum tapping and lower oil and commodity prices. Look to trade a probable range today of 1.2740 to 1.2820.

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