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Dollar continues to drive higher

Posted: 6th October 2021

Daily market report October 6th 2021

Market highlights.

  • Confidence in US growth strengthened during Tuesday with robust US services-sector data.
  • Wall Street equities also posted a solid advance during the day.
  • There was a more defensive mood on Wednesday as high energy prices and inflation concerns pushed US bond yields to 3-month highs.
  • US futures moved lower and Asian bourses lost ground amid inflation concerns.
  • The dollar initially retreated as strong equities eroded defensive buying interest, but secured fresh gains on Wednesday.
  • EUR/USD was unable to hold above 1.1600.
  • Sterling posted further net gains on speculation over a hawkish Bank of England stance with a EUR/GBP retreat to near 0.8500.
  • Commodity currencies were unable to hold gains as the US dollar rebounded.
  • Oil prices surged again on supply issues with WTI hitting 6-year highs.
  • Precious metals were undermined by the increase in bond yields.
  • The Norwegian krone was again boosted by high energy prices.
  • Bitcoin posted 4-weeks high despite higher bond yields.

EUR/USD

The final Euro-zone PMI services index reading was revised marginally higher to 56.4 from the flash reading of 56.3, but both the Italian and Spanish readings were below market expectations for the month. The weaker than expected readings in these countries reinforced concerns that the surge in energy prices will undermine activity, especially in southern Europe where the increase in costs has been most extreme.

ECB President Lagarde stated that the bank will pay close attention to wage developments, but remained confident that higher inflation would be transitory.

The US IBD consumer confidence index retreated further to 46.8 for October from 48.5 previously and the lowest reading since September 2020.

The ISM non-manufacturing index edged higher to 61.9 from 61.7 previously and above consensus forecasts of 60.0. There was a stronger rate of growth in activity with new orders also increasing at a more rapid rate on the month. There was a slight slowdown in the rate of employment growth while delivery times continued to lengthen.

There was a faster rate of cost increases on the month with all sectors reporting higher prices on the month, reinforcing inflation concerns.

The dollar posted limited gains, although relatively narrow ranges prevailed. The US currency was unable to gain significant traction, especially as a strong rebound in equities curbed potential defensive support and EUR/USD settled just above 1.1600.

The latest ADP jobs data will be released on Wednesday which will have an impact on expectations surrounding Friday’s payrolls data. The dollar overall posted net gains as yields moved higher with EUR/USD edging lower to 1.1580.

USD/JPY

US Treasuries lost ground following the US data releases as markets continued to focus on threats of higher inflation in the economy.  Wall Street equities also posted strong gains after the New York open which curbed potential demand for the Japanese currency. Overall, the dollar posted net gains into the European close with USD/JPY advancing to highs above the 111.50 level against the Japanese currency.

Chicago Fed President Evans remained confident that prices will come down as supply chains improve, but he also admitted that bottlenecks were taking longer to resolve. Overall markets concerns surrounding the inflation profile tended to increase during the day.

The US trade deficit increased to a record high of $73.3bn for August from $70.3bn the previous month as imports rebounded strongly. There will be a risk that the widening deficit will undermine the dollar if US assets prices stumble for a sustained period, but the dollar held a firm tone into the New York close.

US bond futures lost ground in Asia on Wednesday with the 10-year yield strengthening to the highest level for over 3 months. Chinese markets remained closed on Wednesday while equity markets moved lower. Yield trends dominated with USD/JPY posting a net gain to around 111.75 with EUR/JPY around 129.40.

Sterling

The final UK PMI services sector index was revised higher to 55.4 from the flash reading of 54.6 with the composite index also revised higher. The data reported that staff shortages were holding back both output and new orders while supply constraints and a spike in costs triggered further upward pressure on prices with output charges rising at a record pace. There were reports that Prime Minister Johnson will announce an increase in the minimum wage.

The PMI data offered some Sterling encouragement while immediate fears surrounding fuel shortages continued to ease. The UK currency gained an element of support on valuation grounds and expectations of capital inflows.  The strong advance in Wall Street equities was also a significant factor underpinning risk sentiment.

Overall, Sterling GBP/USD posted a net advance to around 1.3635 while EUR/GBP dipped to test support near 0.8500. Sterling was unable to make headway on Wednesday with a GBP/USD drift towards the 1.3600 level against the stronger US dollar, although it held firm on the major crosses.

Swiss franc

The Swiss franc initially held firm on Tuesday, but gradually lost ground as equity markets posted strong gains. Overall, EUR/CHF posted a net advance to near 1.0760 while USD/CHF posted higher near 0.9290 before fading slightly.

Markets will continue to monitor National Bank rhetoric closely in the short term while global inflation trends are also likely to have an important impact. The franc edged lower on Wednesday as higher bond yields undermined support for the currency with USD/CHF just below the 0.9300 level.

AUD/USD + USD/CAD

The Australian dollar was initially held in relatively narrow ranges on Tuesday, but gradually gained traction amid a strong advance in global equities. AUD/USD strengthened to highs close to 0.7300 before stalling.

The US dollar posted gains on Wednesday and the Australian dollar was unable to gain further support from high commodity prices with AUD/USD retreating to 0.7260.

The Canadian trade surplus widened to C$1.9bn for August from a revised C$0.7bn the previous month and well above consensus forecasts of C$0.4bn.

The Canadian dollar continued to gain firm support from a further advance in oil prices and the robust tone in equities. Overall, USD/CAD dipped to just below 1.2550, but momentum faded and USD/CAD traded around 1.2600 on Wednesday as the US dollar posted net gains.

NOK+ SEK

The Norwegian krone continued to gain support from gains in oil prices with the firm tone amplified by gains in equity markets.

EUR/NOK dipped to lows below 9.90 and the weakest reading since January 2020. EUR/NOK traded just above 9.90 on Wednesday with USD/NOK just above 8.55.

The Swedish krona gained support from firm equity markets, but struggled to gain significant momentum, especially with a lack of energy resources and EUR/SEK settled around 10.13.

Equities

Euro-zone equities struggled to make any headway in early trading, but buying interest gradually intensified with notable buying support in the banking sector and bourses posted significant gains amid a Wall Street advance.

The strength in energy markets continued to underpin major UK stocks on Tuesday. The latest business confidence data also helped underpin sentiment with a 0.9% gain for the FTSE 100 index, despite important reservations surrounding inflation.

Wall Street equities posted significant gains on Tuesday with a rebound in the tech sector helping to underpin confidence. The S&P 500 index gained 1.0%, although there were still underlying inflation concerns.

US futures moved lower on Wednesday as bond yields moved higher and Asian markets lost ground.

Japan’s Nikkei 225 index closed 1.1% lower with a 0.6% retreat for the Australian ASX index.

Chinese bourses remained closed with Hong Kong’s Hang Seng index 0.7% lower in late trading.

Commodities

Oil prices maintained a strong tone during Tuesday as underlying sentiment remained extremely buoyant on expectations that OPEC restraint would maintain an underlying supply shortage.

The stronger than expected US services-sector data also boosted confidence in demand trends.

WTI strengthened to highs above $79.0 p/b, the strongest reading since early November 2014 while Brent posted fresh 3-year highs.

WTI traded at fresh 6-year highs above $79.30 p/b on Wednesday with Brent also at fresh 3-year highs near $83.00 p/b.

Precious metals recovered from intra-day lows on Tuesday as the dollar edged lower, but higher bond yields sapped support.

Overall, gold settled around $1,760 per ounce with limited net silver gains to $22.60 per ounce.

Metals lost ground on Wednesday as US yields continued to increase with gold just above $1,750 per ounce and silver just below $22.50 per ounce.

Cryptocurrencies

Cryptocurrencies were held in tight ranges ahead of the New York with a limited correction.

There was, however, renewed buying after the US open as equity markets posted strong gains and risk appetite improved.

Bitcoin was able to make a more decisive break above the $50,000 level with a peak near $51,000.

Although there was pressure for a correction, bitcoin held firm and tested 4-week highs around the $52,000. Coins stabilised later in the Asian session, but were resilient given the dip in equities and higher US yields.

Ether also posted an advance to 2-week highs above $3,500 before a limited retreat.

Calendar

Major events for the day ahead: (times in BST)

13.15: US ADP employment report

15.30: US EIA inventories data

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