OCBC Bank

FX Themes/Strategy

  • The overnight US CPI miss led to attempts to impute risk-on as Fed expectations marginally pared back and UST yields retreat. However, sentiment soured as crude pared gains and US equities softened throughout its session. On net, the FX Sentiment Index (FXSI) continued to lean towards Risk-Off
  • The USD shook off CPI-driven declines on the turn in risk, with the DXY Index only marginally softer. Traditional havens, JPY and CHF outperformed, while the cyclicals bloc, led by the AUD lead losses.
  • The AUD’s underperformance stemmed from comments by RBA’s Lowe, who was explicit in questioning market expectation for RBA rate hikes in 2022 and early 2023, and reiterated that conditions for rate hike may not in place before 2024. Lowe essentially corroborated the record number of AUD shorts added by the investment community in the latest week. Couple this with the extended tapering timeline, AUD-optimism from RBA tapering should be doused.
  • Softer back-end UST yields post-CPI disadvantages the USD on yield differential arguments, but the actual translation to the USD may be limited given that Fed expectations have not shifted materially. Retain a net positive bias on the USD, but reiterate that the overall posture is likely flat-to-higher. With the recovery softening but not off the cliff, and still a lack of clarity on the Fed tapering front, expect this less than convicted market action to continue. Preference still to be short of the AUD against the USD and NZD

Natixis

FX: the sharper-than-expected slowdown of US inflation in August weighed on the US dollar, as this supported the Federal Reserve’s belief that the acceleration seen in recent months will prove transient. The DXY index declined by 0.16% to 92.53. With the notable exception of the Australian dollar, G10currencies appreciated against the USD. The Australian dollar weakened against all G10 currencies, hitting a two-week low against the greenback, after Reserve Bank of Australia Governor Philip Lowe indicated that GDP was expected to contract sharply in Q3. The euro inched up to 1.182 against the US dollar, while implied volatility for 3-month and 9-month ATM EUR/USD options hit new YTD lows. Emerging currencies went their separate ways, but were stable on average.

Commodities: base metal prices pulled back on growing concerns about the Chinese property market. Evergrande's potential default on its $300bn debt could send shockwaves through the property market. Meanwhile, gold holdings in physically-backed gold ETFs remained stable at around 3,100 tonnes, a level that has remained relatively unchanged since April.

Equities: rather mixed reaction to the US CPI. The Stoxx 600 was flat, penalised by financials and basic resources, while tech and healthcare outperformed. Despite inflation and/or the Federal Reserve now being less likely to surprise, implied volatilities were virtually unchanged, with declines of around only 0.2-0.3 for the VIX and VStoxx. In the United States, the trend remains favourable to the Growth style (out performance of Nasdaq and tech sector), while financials were the most negatively impacted. In Asia, the Nikkei (+9% MTD) reached its highest level since 1990 yesterday.