XE Market Analysis: Asia - Jun 18, 2021

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The Dollar rallied in N.Y. on Friday, with gains coming early following comments from the Fed's Bullard, who said we are experiencing "...more inflation than we were expecting." He added “I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.” Treasury yields shot up on the comments, taking the USD broadly higher. The Greenback reversed a bit lower later into the weekend, as profit taking, driven by the subsequent easing of yields set in. Given heightened inflation concerns, the USD may still have some room to run higher. There was no U.S. data on Friday. Wall Street didn't like the inflation talk, and stayed lower through the session. The DJIA put in its worst week since January.

EUR-USD printed better than two-month lows of 1.1847, down from 1.1912 at the open. The move lower came following an interview with the Fed's Bullard who said inflation and growth are both hotter than previously expected. Treasury yields popped higher, putting pressure on the pairing, though the 10-year rate later eased back, allowing EUR-USD to climb back over 1.1880. The FOMC induced USD rally seen since Wednesday probably still has some legs, as the shift in rate hike timing and inflation rates should keep the Dollar underpinned for now. Our next EUR-USD downside target comes at 1.1800.

USD-JPY rallied from 109.94 lows seen in London to 110.49 highs in early N.Y. The pairing later slipped back to 110.04 before steadying near 110.20. USD-JPY was largely left out of this morning's Bullard driven Dollar rally, as the safe-haven Yen found some support on the back of wilting equity markets. The BoJ stuck to its ultra-accommodative policy setting overnight, leaving the 10-year bond yield target unchanged at around zero, while maintaining the policy balance rate at -0.1%. At the same time the bank announced that it will extend its Covid-era lending program beyond September with an extension of 6-month. There was nothing unexpected from the announcement, and there was no discernable impact on the Yen.

Cable fell to a two-month low at 1.3795 on the back of broad dollar gains that have been seen following the FOMC on Wednesday, and hawkish comments from the Fed's Bullard Friday morning. Aside from dollar firmness, the pound also came under broader pressure, reversing a large portion of the gains it saw against the euro over the prior two days. UK retail sales for May also unexpected contracted by 1.4% m/m after rising sharply, by 9.2% previously. New Covid infections also spiked by over 9k yesterday, though there is a silver lining to this cloud in that the spread is being accounted for by younger unvaccinated adults while older, vaccinated people are largely proving to be immune.

The Swiss National Bank was on hold at its June meeting. Overall policy settings remain unchanged and the SNB remains committed to ensure generous liquidity supply and low rates, while keeping a lid on the CHF by intervening in currency markets. Like elsewhere in Europe, the growth outlook has improved somewhat and officials expect strong growth in the second and third quarters, but for now uncertainty remains high, though with inflation still very low, the SNB can afford to take a very gradual approach, while relying on the countercyclical capital buffer to keep risks from real estate bubbles under control.

USD-CAD rallied to 1.2481 highs, with additional buyers stepping in above the 100-day moving average, which sits at 1.2429. The pairing has decoupled from its negative correlation with oil prices recently, ignoring the fact that WTI crude was back over the $72 mark. USD-CAD is at levels last seen on April 26, as the USD moves broadly higher on increased inflation concerns, heightened by the Fed's Bullard earlier said we are experiencing "...more inflation than we were expecting." He added “I think it’s natural that we’ve tilted a little bit more hawkish here to contain inflationary pressures.” The DXY has hit better than two-month highs of 92.36 this morning. For USD-CAD, the next upside target comes at the psych 1.2500 level.

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