USD Exhaustion Finally Showing Through
In recent weeks, the signs of USD exhaustion have been pretty evident - notable was the limited response to the US employment report last Friday, which was strong on all counts including wage inflation. We saw this lifting the odds of a Dec hike to close o 70% - Sep's FOMC all but fully priced in for another 25bps to be added to the Fed Funds rate which currently stands at 2.00%.
The latest spur to trim USD longs - the market still net long - has been the softer producer and consumer prices indices, with yesterday's lower than expected print in CPI combining with a more upbeat ECB press conference to send EUR/USD back to 1.1700. London traders have pushed back above the figure level this morning, though was expected to struggle ahead of the 1.1750 mark - which it duly has done.
Later on today we get the latest retail sales figures, and any weakness here will underline this USD weakness, which may take a little time to unfold. The reason for this looks to be coming from USD/JPY. The rate continues to press for higher levels and has tested 112.00 today, showing that yield differentials are still - to some degree - a driver of FX trade.
Should we see this factor start to fade, then USD/JPY will fall in line with the rest of the spot rates, though for now, looks set to hold its ground. Stock markets are again buoyant, so this adds to the negative JPY tone, but as we can see, USD/CHF is less responsive to periodic bouts of risk on and this is another sign that the USD is losing its edge.
The USD index (DXY) has also taken out 94.50, but only a close on the week will add to confirmation that a peak has been set in place near to medium term.