US dollar firms pre-FOMC

Dollar eyes FOMC meeting

The pre-FOMC jostling continues with the US dollar rising overnight, despite US yields heading slightly lower. The dollar index rose 0.24% to 94.10, easing slightly to 94.07 in Asia. With a pile of US data to come before the FOMC later, I expect the index to trade in a choppy 93.80 to 94.20 range. A USD 15 bio per month Fed taper looks to be priced in now and the greenback could fall if the FOMC announces that and stubbornly clings on to their transitory inflation and 2023 hiking path. A higher monthly taper could frighten markets though and see US yields and the US dollar move sharply higher. It is very much a binary outcome tonight.

EUR/USD has eased to 1.1580 in Asia and the single currency should range ahead of the FOMC although it remains highly vulnerable to a hawkishly dovish Fed.  Support is at 1.1520, failure of which signals more losses to 1.1400. Resistance remains at 1.1700. Sterling has retreated again overnight, falling to 1.3610 in New York before recovering to 1.3630 in Asia. The crowded BOE hiking trade unwinding has continued and I am beginning to wonder if a 15bps hike tomorrow is no longer priced in.  A dovish Bank of England can still see sterling retest the 1.3400 region, but equally, a rate hike and a hawkish outlook could see it jump to 1.3700 and 1.3750.

USD/JPY is locked in a narrow range each side of 114.00 once again. Trading volumes are lower due to a Japanese holiday. It remains a slave to the US/Japan rate differential and as such, will not see much movement until tonight’s FOMC announcement. USD/JPY has support at 113.40 while a rise through 114.70 signals more gains above 115.00. A hawkish FOMC opens a test of 116.00.

AUD/USD and NZD/USD have been punished after a dovishly tiny bit hawkish RBA decision yesterday, and RBNZ warnings over the pace of rate hikes and reopening headwinds and asset prices. AUD/USD has collapsed by 1.25% overnight to 0.7440 today, while NZD/USD retreated by 1.0% to 0.7120. A dovish FOMC will lift both currencies, but any signs of hawkishness risks both extending much deeper losses. AUD/USD has closed below support at 0.7450 and risks testing 0.7300 if the FOMC blinks on inflation. Similarly, NZD/USD has closed below support at 0.7130 overnight and risks a larger fall to 0.7000.

The PBOC set a slightly weaker yuan setting today at the USD/CNY fixing, and combined with pre-FOMC nerves, the KRW, THB, MYR and TWD have fallen 0.20% against the US dollar. Regional Asia has a much higher beta to the US monetary policy than most parts of the world, especially with interest rates at record lows in the region and unofficial pegs to the greenback. If US monetary policy is set to diverge from regional Asian policy, my base case, we are likely to see a wave of selling across regional currencies. That is unless the region’s central banks decide to start spending foreign reserves to defend the currencies. With high energy prices and the northern hemisphere winter to come, that may well be the preferred option initially, rather than in imported inflationary shock further down the road. The FOMC tonight should help answer these questions.

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