Soaring dollar raises alarm as China, Japan push back.

Headlines

* Japan warns it will not rule out FX options if yen selling persists

* Bank of Canada set to pause as economic headwinds strengthen

* Oil tests November high after OPEC+ leaders extend supply cuts

* Asian shares mixed as global growth concerns mount

FX: USD moved above the June/July top to close at near 6-month highs. Sour sentiment from China saw weakness in stocks and higher yields which helped the buck. The 10-year yield has moved sharply higher this morning and is trading at 4.25%. Strong resistance sits around the August high and October 2022 top at 4.33/36%.  The 2-year yield has bounced off the 50-day SMA and is currently at 4.93%. This yield very closely tracks Fed funds futures for the September meeting. This is currently locked in for no change to rates.

EUR moved down to three-month lows, breaking near-term support around 1.0765/72. The June bottom sits just in the 1.0660 area. The chance of a 25bp rate hike next week is around 20-25%.

GBP remains below its 100-day SMA, currently at 1.2655. Buyers are desperately trying to hold support around the 1.2560 zone. BoE Governor Bailey testifies in front of Parliament today and may sound hawkish.  A September hike is priced in with a peak rate of around 5.7%.

USD/JPY broke last week’s high and closed at a year-to-date top at 147.80. This spurred renewed verbal intervention. The top currency diplomat Kanda warned that the authorities won’t rule out any options in response to FX moves.

AUD dropped to a fresh 10-month cycle low at 0.6357. That level was last seen in November. USD/CAD advanced to 1.3669. This was just above the April top at 1.3667. The BoC rate decision today will see rates left unchanged.

Stocks: US equities closed mostly lower. Recent weak global PMI data and rising yields weighed on risk-taking.  Energy and tech outperformed. The benchmark S&P 500 settled 0.42% lower at 4497. The tech-heavy Nasdaq finished up 0.11%. The Dow lost 0.56% settling at 34641.

Asian stocks were mostly in the red. The region also digested the weak data. The Hang Seng suffered from tech weakness. But losses stemmed as developers surged on hopes of more Government support. The Nikkei 225 bucked the trend and reclaimed 33k. The weaker yen helped.

US equity futures are muted. European equity futures are pointing to a lower open. The Euro Stoxx 50 closed down 0.3% yesterday.

Gold suffered as yields and the dollar went higher. The 50-day SMA now sits above at $1932. The 200-day SMA is at $1916.

Day Ahead – Bank of Canada meeting and US ISM data

There seems to be a lot happening in markets at the moment. Oil rising to year highs could have implications for even stickier inflation. Jawboning is increasing in Japan as USD/JPY makes fresh highs. The major is firmly in the intervention zone from last autumn when the authorities spent close to $70bn. Markets are also struggling with rising yields again. We get US ISM services figures today. Leading data suggests they will be on the weak side which may put a dent in the dollar.

The Bank of Canada meeting should be relatively quiet. Rates are expected to stay at 5% after two 25bp hikes in June and July. The bank will likely say its work may not be done and leave the door open to more tightening if needed. This is due to inflation ticking up in July. It seems prudent for the central bank to wait until October to make any tweaks to the policy as today’s meeting is a statement-only decision with complete forecast updates due to be published next month.  

Chart of the Day – USD/CAD bumps into resistance

The CAD has struggled recently even though crude prices have been rallying hard. But the risk backdrop is subdued with cyclical currencies in general having a tough time. A “hawkish hold” is more or less expected by the BoC today. Anything less and USD/CAD will make new highs. Resistance remains at the May top at 1.3667. The December and January highs reinforce this area. 

(Sources: vantagemarkets.com)