DXY, yields soar, Fed hike rates, Powell sees more increases ahead

GBP Plunges, UK Growth Outlook Worsens; EUR, AUD/EMFX Slump

Summary: The Dollar Index (USD/DXY), a favourite gauge of the Greenback’s value against a basket of six major currencies, soared 0.96% to 103.60 (102.50 yesterday), matching it’s close on Tuesday (highs not seen since November 2002). This came a day after the FOMC raised interest rates by 50 basis points and signalled it will keep hiking at this pace in next couple of meetings. It was the biggest interest rate increase since 2000. The US central bank also decided to taper its holdings of Treasuries by USD 47.5 billon per month. The benchmark US 10-year Treasury bond yield jumped 11 basis points to finish at 3.04% from 2.93% yesterday. Elsewhere, the Bank of England raised its key Bank Rate by 25bps to 1% which was its fourth consecutive increase. Sterling, however, plunged 2.04% to 1.2360 (1.2630) after the BOE policymakers said global inflationary pressures had led to a deterioration in the outlook for UK growth. The Euro (EUR/USD) reversed initial gains, sliding 0.77% to 1.0545 from 1.0624. Germany, the largest economy in the European Union saw March Factory Orders plunge more than expected to -4.7% against estimates at -1.0%.

The Australian Dollar tumbled 1.96% to 0.7110 (0.7252), surrendering all its post RBA rate hike gains, and more. It’s Tasman cousin, the Kiwi (NZD/USD) lost 1.91% to 0.6430 from 0.6542. Against the yield sensitive Japanese Yen, the Dollar ratcheted higher to 130.20 (129.14). Higher US yields saw the Greenback close with robust gains versus the Asian and Emerging Market currencies. The USD/SGD (US Dollar-Singapore Dollar) soared to 1.3840 (1.3745) while USD/CNH (US Dollar-Offshore Chinese Yuan) rocketed higher to 6.6825 from 6.6170. Other global bond yields finished mixed. Germany’s 10-year Bund yield climbed to 1.04% (0.97%). The UK 10-year Gilt rate was unchanged at 1.96%. Japan’s 10-year JGB yield closed flat at 0.22%.

Data released yesterday saw Australia’s Building Approvals (m/m) drop to -18.5%, against median expectations of -11.7%. Australia’s Trade Surplus rose to +AUD 9.31 billion against forecasts at +AUD 8.5 billion. Switzerland’s CPI eased to 0.4% from 0.6% but beat expectations at 0.3%. French Industrial Production dipped to -0.5%, lower than estimates at -0.2%. UK Final Services PMI rose to 58.9 from a previous 58.3 which was what economists expected. The Bank of England voted unanimously to raise it key Bank Rate to 1% from 0.75%. US Weekly Unemployment Claims rose to 200,000 from 180,000. US Preliminary Nonfarm Productivity (q/q) fell to-7.5% from a previous 6.3%, and median expectations of -5.1%. Wall Street stocks plunged. The DOW lost 2.47% to 33,163 (34,040) while the S&P 500 fell 2.91% to 4,167 from 4,298 yesterday.

• EUR/USD – the Euro reversed its gains made yesterday, sliding 0.77% to close at 1.0545 from 1.0624. The ECB has its next monetary policy meeting in June (10). The surprise slump in Germany’s March Factory Orders which was larger than economist’s estimates (-1.0%) had traders questioning how quickly the ECB can withdraw stimulus without strangling activity. Overnight low traded was at 1.0492.
• GBP/USD – Sterling plunged to 1.2362 from its opening at 1.2630 after the Bank of England raised its key Bank Rate by 25 bps to 1%. Policymakers though said that global inflationary pressures had led to a deterioration in their growth outlook for the UK economy. In choppy trade, the low traded was at 1.2325. While the overnight high recorded was at 1.2633. Wow.
• AUD/USD – slip-sliding away. After the Aussie Battler took off following the rate hike by the RBA, the AUD/USD pair quickly reversed its gains as risk appetite soured. The AUD/USD pair finished in New York at 0.7110 from 0.7252 yesterday. Overnight the Aussie Battler plunged to a low at 0.7077 before rebounding in late New York.
• USD/JPY – the Greenback finished 0.7% higher against the Japanese Yen to 130.20 from 129.14 yesterday. The spike in the US 10-year bond yield above 3% to 3.04% (2.93% yesterday) lifted this USD/JPY pair. Despite the deterioration in risk appetite, traders could not ignore widening yield differentials between the US and JPY rates. Japan’s 10-year JGB yield was unchanged at 0.22%.

On the Lookout: Today’s calendar releases will see more choppy trading ahead after an already volatile week. Japan starts off with its Tokyo Core CPI report (f/c 1.8% from previous 0.8%). The Reserve Bank of Australia releases its Monetary Policy Statement (11.30 am Sydney). Switzerland kicks off Europe with its Unemployment Rate for April (f/c 2.2% from 2.4% - ACY Finlogix). Germany follows with its March Industrial Production (m/m f/c -1% from 0.2%). The UK is next with its UK Halifax House Price Index for April (m/m f/c 0.8% from 1.4%; y/y f/c 10.1% from 11% -FX Street). UK April Construction PMI follows (f/c 58 from 59.1 – ACY Finlogix). Canada kicks off North America with its April Employment Change (f/c 55,000 from previous 72,500 – ACY Finlogix), Canadian April Unemployment Rate (f/c 5.2% from 5.3% - ACY Finlogix). The US rounds up today’s economic calendar releases with its April Non-Farms Payrolls (f/c 391,000 from 431,000 – ACY Finlogix), US April Unemployment Rate (f/c 3.5% from 3.6%) and April Average Weekly Hours/Wages (f/c 34.7 from 34.6 – ACY Finlogix). Canada releases its April IVEY PMI (f/c 70.0 from 74.2 – FX Factory).

Trading Perspective: Following its post FOMC rate hike fall, the Dollar rebounded against all its Rivals after Fed Chair Jerome Powell made clear that further large rate increases are coming. Powell said that additional 0.50% hikes “should be on the table in the next couple of meetings” in June and July. This saw the Dollar Index (DXY) break back through the 103.50 resistance level with the 104.00 (November 2002 high) within reach. Today sees the release of April US Payrolls which promise more choppy trading ahead. April US Non-Farms Payrolls increases are forecast to dip to a median 391,000 from a previous 431,000. Watch the NFP number. A Payrolls increase of less than 350,000, say 320,000 or less could see the Greenback plunge. A NFP gain of over 400,000 would see the DXY break up through 104.00. One thing is assured, expect more volatile trade ahead. It’s Friday though, take it easy, but keep those tin helmets on. And get ready to rumble once again!

• EUR/USD – the Euro continues to trade heavy, and its reversal overnight suggests more selling to come. Market sentiment on the shared currency is very negative. The shared currency has immediate support at 1.0510 followed by 1.0485. A break below 1.4085 would see supports at 1.0450 and then 1.0420 tested. Immediate resistance lies at 1.0580, 1.0610 and 1.6040. Look for further choppy trade today in a likely range of 1.0470-1.0620. Prefer to sell rallies, we could see parity around the corner.
• GBP/USD – Sterling saw heavy selling emerge after the Bank of England voted to raise its key Bank Rate to 1% from 0.75%. Following comments by policymakers that saw their UK growth outlook deteriorate due to rampaging inflation, the British currency was pounded lower. Sterling closed at 1.2360 from 1.2630 yesterday. Immediate support lies at 1.2330 (overnight low 1.2325) followed by 1.2300 and 1.2270. Immediate resistance can be found at 1.2400, 1.2450 and 1.2500. Look for another choppy trading session in this currency pair, likely range 1.2320-1.2570.

(Source: Finlogix.com)

• AUD/USD – the Aussie Battler did a U-turn on broad based US Dollar strength and weaker Asian and Emerging Market currencies. The Aussie Dollar closed at 0.7110 from its open at 0.7252 yesterday. On the day, immediate support can be found at 0.7075 (overnight low 0.7077). The next support level comes in at 0.7045 and 0.7015. On the topside, immediate resistance lies at 0.7145, 0.7185 and 0.7205. With the market in risk-off mode, the preference is to sell AUD/USD rallies. Likely range, 0.7070-0.7230. Only an extremely weak US Payrolls report could renew the Aussie Dollar’s topside.
• USD/JPY – the US Dollar’s rally against the Yen was subdued due to the souring of risk sentiment. Despite higher US bond yields, the Greenback settled 0.70% up against the Japanese Yen at 130.20 (129.14 yesterday). Immediate resistance lies at 130.55 (overnight high). This is followed by 130.85 and 131.05. Immediate support can be found at 129.85, 129.50 and 129.20. Look for a volatile session in this currency pair with a likely range trade today of 129.30-130.30. Heading into tonight’s US Payrolls report, just trade the range shag.

Have a top trading and Friday ahead all, keep those tin helmets on. All the best for the weekend.