US Dollar puzzled after Fed's Kashkari calls for at least another year of steady rates
|- The US Dollar overcomes brief deep on the back of weaker US data.
- Fed's Kashkari paints a gloomy view in terms of timing before inflation is back in range.
- The US Dollar index jumps back to near 105.50.
The US Dollar (USD) is seeing its earlier gains from the ASIAPAC session being trimmed back after softer Jobless Claims data and even worse Housing data. Another data point from the Housing Sector that is pointing to easing or softening in the sector. Add in there the uprise in Continuing Claims, where rather a decline was expected, and again the US Dollar is not really convincing here in terms of performing data.
On the US economic data front, only the US Federal Reserve speakers ahead. Although not that much is expected because recent messages were already quite hawkish. How much more hawkishness can you add? There is a limit and looks that that limit has been reached; with markets being fed up receiving the same hawkish message for weeks from Fed officials.
Daily digest market movers: Kashkari adds to hawkishness
- An eventful Asia-Pacific session triggered substantial moves in the Forex space:
- The People’s Bank of China (PBoC) has let loose its daily fixing, weakening to a fresh low for 2024 against the US Dollar.
- The New Zealand Dollar (NZD/USD) advanced substantially against the Greenback after the country’s economy expanded by 0.2% in the first quarter, which means the country is out of its brief technical recession.
- Asian equities rolled over with concerns that the Chinese economy might be doing worse than markets anticipated, seeing the actions from the PBoC to devalue its currency.
- A big batch of data was released at 12:30 GMT:
- May’s Building Permits and Housing Starts:
- Building Permits misses estimates and fell back from 1.44 million to 1.386 million.
- Housing Starts also declined, missing upbeat estimates, by heading from 1.352 million to 1.277 million.
- Weekly Jobless Claims:
- Initial Claims went from a revised 243,000 to 238,000.
- Continuing Claims jumped from 1.813 million to 1.828 million people out of a job.
- The Philadelphia Fed Manufacturing Survey for June missed the mark as well and came in at 1.3, coming from 4.5 and missing the consensus of 5.
- May’s Building Permits and Housing Starts:
- Two US Federal Reserve Speakers to look out for was well this Thursday:
- At 12:45 GMT, Federal Reserve Bank of Minneapolis President Neel Kashkari participated in a fireside chat as part of the Michigan Bankers Association Annual Conference. Kashkari said that it might take up to a year or even two year before inflation is back to 2% target. Wage growth is still to high to get their quicker, Fed's Kashkari commented.
- Near 20:00 GMT, Federal Reserve Bank of Richmond President Thomas Barkin participates in a conversation and Q&A session about the economic outlook at the Richmond Risk Management Association.
- Equities are still in good tone to snap the negativeness from the Asian trading session. European equities are holding on to gains while US futures are up near 0.50% ahead of the US opening bell.
- The CME Fedwatch futures for September are further backing in a rate cut, with odds now standing at 59.5% for a 25 basis point cut. A rate pause stands at a 34.1% chance, while a 50-basis-point rate cut has a slim 6.4% possibility.
- The US 10-year benchmark rate is trading at 4.28%, ticking up from the 4.24% earlier this Thursday and after the comments from Fed's Kashkari.
US Dollar Index Technical Analysis: Not so data dependent
The US Dollar Index (DXY) is putting up a heavy fight, with a bit of a thank you to the Asian uncertainty after the PBoC let loose its stronger Yuan fixing. With concerns growing that there might be something brewing in China with more monetary policy coming in, some slumbering support for the DXY could linger on and limit any substantial downturns.
On the upside, there are no big changes to the levels traders need to watch out for. The first is 105.52, a barrier that held during most of April. The next level to watch is 105.88, which triggered a rejection at the start of May and will likely play its role as resistance again. Further up, the biggest challenge remains at 106.51, the year-to-date high from April 16.
On the downside, the trifecta of Simple Moving Averages (SMA) is still playing as support. First is the 55-day SMA at 105.14, safeguarding the 105.00 figure. A touch lower, near 104.61 and 104.48, both the 100-day and the 200-day SMA are forming a double layer of protection to support any declines. Should this area be broken, look for 104.00 to salvage the situation.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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