Dollar Gains Despite U.S. CPIs Slowdown
JFD Team | Sep 15, 2021 03:51AM ET
The US dollar edged north, while equities drifted south, even after the US CPIs for August slowed by more than anticipated. With inflation still well above the Fed’s objective, it seems that investors maintained their bets that Fed officials will begin the tapering process later this year. The UK CPIs were released early today, with both the headline and core rates rising by more than expected. Later in the day, it will be Canada’s turn to release inflation numbers, with a potential accelerating perhaps encouraging CAD-traders to add to bets over an October tapering by the BoC.h2 Market Participants Maintain Bets Over Fed Tapering This Year/h2
The US dollar traded higher against most of the other major currencies on Tuesday and during the Asian session Wednesday. It gained against AUD, CAD, GBP, NZD, and EUR, in that order, while it underperformed versus JPY and CHF.
The relative strength of the US dollar and the safe-havens yen and franc, combined with the weakening of the risk-linked currencies, suggests that financial markets may have traded in a risk-off manner yesterday and today in Asia. Indeed, looking at the performance in the equity world, we see that although EU indices finished mixed, Wall Street finished in the red, with the Dow Jones losing 0.84%. Appetite remained weak during the Asian session today as well. The only exception was South Korea’s KOSPI, which gained 0.29%.
Yesterday, as was widely expected, the highlight on the economic agenda was the US CPIs for August. Although the headline rate ticked down to +5.3% yoy from +5.4% as forecasted, the mom rate unexpectedly slid to its lowest in six months. What’s more, the core CPI slowed to +4.0% yoy from +4.3%, instead of just ticking down to +4.2% as the forecast suggested.
Initially, the US dollar slid, and equities rose, as some market participants believed that with the CPIs showing early signs of peaking, the Fed could be more patient and delay its decision to begin tapering its QE purchases. However, the reaction was short lived. Soon thereafter, the dollar rebounded to finish higher against most of the other majors, while equities, especially in the US, pulled back.
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This suggests that the majority of the financial community remained convinced that the Fed will eventually begin trimming its bond purchases this year. And to be honest, their view seems more than reasonable. Despite the slowdowns, both the CPI rates remain well above the Fed’s objective of 2%, while the PPI rose to a record of +8.3% yoy in August, suggesting that inflationary pressures may have not hit a ceiling yet.
With all that in mind, we would expect the US dollar to continue drifting north for a while more, especially if more Fed officials come out and say that they support tapering to begin this year, while equities may continue correcting lower. However, we would not call for a major trend reversal in equities, as data justifying tapering also point to an improving economic outlook. Thus, at some point, we would expect Wall Street indices to rebound and resume their prevailing uptrends.h2 EUR/USD Technical Outlook/h2
EUR/USD spiked up at the time the US CPIs were released but hit resistance at 1.1845 and pulled back soon thereafter. Overall, the pair remains below the short-term upside support line taken form the low of Aug. 20, as well as below a newly-drawn line taken from the high of Sept. 3.
With that in mind, we would consider the short-term outlook to still be negative.
A dip below 1.1797 could initially pave the way towards Monday’s low of 1.1770, the break of which would confirm a forthcoming lower low and could allow declines toward the 1.1742 barrier, marked by the low of Aug. 26. If the bears are not willing to stop there, then we may see them diving towards the 1.1705 zone, defined as a support by the low of Aug. 19.
We will abandon the bearish case if we see a recovery back above 1.1857, a resistance marked by the inside swing low of Sept. 6. The rate will already be above the downside line taken from the high of Sept. 3, and may rise to the peak of Sept. 7, at 1.1885, or the high of Sept. 3, at 1.1908. If neither hurdle is able to stop the advance, then we may experience extensions towards the 1.1940 zone.
As for today, during the early EU session, we already got the UK CPIs for August. The headline rate surged to +3.2% yoy from +2.0%, while the core one climbed to +3.1% yoy from +1.9%, both exceeding the +2.9% yoy forecast. Following the better-than-expected employment report yesterday, accelerating inflation, and a potential rebound in retail sales on Friday, could allow GBP-traders to increase their bets over a rate hike by the BoE soon, and push the pound higher this week, especially against currencies the central banks of which are expected to keep interest rates at low levels for much longer, like the euro, and the Aussie. We excluded the yen, as the Japanese currency could attract flows from the reduced risk appetite we saw yesterday and today, which, as we noted, could continue for a while more.
We get more August CPIs later in the day, this time from Canada. The headline rate is forecast to have inched up to +3.9% yoy from +3.7%, while no forecast is available for the core one. The Trimmed mean and Common rates are forecast to have held steady at +3.1% yoy and +1.7% yoy respectively.
Last week, the BoC kept interest rates at a record low of +0.25% and maintained its QE program, as was widely anticipated. In the statement, it was noted that they expect growth to strengthen in the second half, though a fourth coronavirus wave and supply bottlenecks could weigh on the recovery. What’s more, they maintained the guidance that the economic slack would be absorbed sometime in H2, 2022, which means this is when they expect to start raising interest rates.
Following the latest disappointing data, especially the economic contraction in Q2, many participants may have been expecting the Bank to announce a delay in its tapering plans. However, that was not the case. Yes, there was no action at this gathering, but this could be due to the fact that the federal elections are planned in a few days, and perhaps because this was a smaller meeting, with no updated economic projections and a press conference.
In our view, the door for another tapering in October remained open, and this was confirmed by BoC Governor Tiff Macklem, who on Thursday said that he and his colleagues are moving closer to a time when continuing to add stimulus through QE won’t be necessary. Therefore, following Friday’s decent employment data, further acceleration in the CPIs could add to the case of an October tapering and could support somewhat the Loonie. However, with the risk sentiment subdued lately, we would avoid exploiting and CAD gains against the safe havens. We prefer to do so against the Aussie, as the RBA appears to be one of the most dovish major central banks.
h2 AUD/CAD Technical Outlook/h2AUD/CAD traded in a consolidative manner yesterday, staying between the 0.9272 and 0.9295 levels. Overall though, the rate continues to print lower highs and lower lows below the prior upside support line drawn from the low of Aug.24, and thus, we would consider the short-term picture to be negative.
A dip below 0.9272 will confirm another lower low and may initially target the 0.9240 or the 0.9230 levels, where another dip could carry more bearish implications and perhaps see scope for extensions towards the low of Aug. 30, at around 0.9180.
Now, in order to start examining the upside case again, we would like to see a break above 0.9375. This will confirm a forthcoming higher high on the daily chart and may open the path towards the high of July 19, at 0.9418. If the bulls are not willing ot stop there either, then we could see them climbing towards the 0.9450 territory, defined as a resistance by the inside swing low of May 7.
During the EU session, Eurozone’s industrial production is expected to have rebounded 0.6% mom in July after sliding 0.3% in June. Later in the day, we get the New York Empire State manufacturing index for September, which is expected to have slid to 18.00 from 18.30.
With regards to the energy market, we have the EIA (Energy Information Administration) report on crude oil inventories for last week, which is expected to reveal a 3.544mn barrels decline, following a 1.529mn slide the week before. That said, bearing in mind that, yesterday, the American Petroleum Institute revealed a 5.437mn barrels fall, we would see the risks surrounding the EIA number as tilted to the downside.
As for the speakers, we will get to hear from ECB Executive Board member Philip Lane.
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