Daily brief: US dollar pullback green lights APAC currency rally ahead of NZD economic data

Thursday’s Asia-Pacific outlook

A risk-on rally overnight on Wall Street sets up Asia-Pacific markets for a higher open as the safe-haven US dollar falls against its major peers. The benchmark S&P 500 Index closed 1.97% higher as Treasury yields fell. WTI crude oil prices climbed and underlying spreads, including the 1:1 and 3:2:1 crack spreads, indicated that refiners see demand improving.

The effects from Hurricane Ian, currently battering Florida, may explain the higher spreads too, as several high-volume off-shore rigs are offline to safeguard workers during the storm.

The Bank of England (BoE), responding to bond market turmoil sparked by an ill-advised fiscal plan, including tax cuts during a rate-hiking cycle, announced an emergency Gilt-buying package on Wednesday.

The BoE, however, avoided placing blame on lawmakers, likely to maintain its perceived neutral stance on politics. The measure reverses the BoE’s selling of Gilts temporarily and will now buy 5 billion in long-dated bonds over the next several weeks.

Today’s 7-year Treasury auction saw surprisingly good demand, fetching a 2.57 bid/cover ratio. That was despite a surge in Treasuries that drove yields lower. Still, a ~7% rate was attractive enough for direct bidders, although indirect buyers were relatively weak. rate hike bets have been scaled back recently. Fed funds futures show the US rate peaking at 4.42% in May 2023. That pricing was at 4.7% on September 23.

APAC currencies benefited from the USD’s pullback. The Australian dollar and New Zealand dollar gained against the Greenback, and the NZD outperformed its cross-Tasman counterpart, with AUD/NZD falling for a second day.

The offshore Chinese yuan fell after USD/CNH spiked to a record high level in overnight trading. New Zealand economic data is in focus today, with ANZ activity outlook and business confidence for September on tap to cross the wires at 00 GMT.

US dollar DXY - technical forecast

The DXY Index pulled back to a major trendline that has gyrated between offering support and resistance going back to May. The pullback is overdue but may have more room to run when looking at the DXY’s RSI and MACD oscillators.

The RSI crossed below its 70 mark, and MACD is now declining, on track to see a signal line crossover. Some consolidation may be in order versus a broader pullback, however, but if prices continue to descend, the June 2002 high or the 20-day SMA offers tangible targets for bulls to regroup.

US dollar DXY – daily chart

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