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Month-End and Fed Chair Powell Prompt Volatile Currency Markets

FOREX
  • The USD index encountered multiple substantial swings on Wednesday as a mixture of month-end flows and central bank rhetoric frustrated short-term positioning as we approach Friday’s US employment report.
  • The greenback spent the majority of early Wednesday trading on the backfoot as some renewed optimism surrounding China was underpinning equity markets. Additionally, some weaker data from the US (lowest MNI Chicago PMI print, of 37.2, since the 2008/09 crisis) prompted the USD index make new intra-day lows.
  • However, potential growth concerns then started to weigh on risk/equity markets which not only supported the USD but ignited a complete reversal over the next hour. The price action also tied in with the month-end WMR fix with the USD printing a fresh high right around 1600GMT/1100ET.
  • With markets then potentially gearing up for a hawkish Powell, disappointment rightly ensued as the Fed Chair alluded to everything being aligned for inflation to return to target, except for the labour market which showed initial signs of slowing in today’s ADP release.
  • The initial reaction was very positive for equity markets and a substantial USD sell-off has followed. USDJPY has fallen from around 139.50 and is now breaching below the 138 mark. In similar vein, EURUSD is now pushing back above 1.04.
  • Mixed performance in emerging market FX, however worth noting some particular underperformance for the South African Rand amid reports that President Ramaphosa may have violated the constitution, setting up a case for impeachment. USDZAR is up 0.85% at 17.15 as of writing, despite the USD weakness.
  • The Chinese Yuan has extended yesterday’s rally with CNY up 1.20% and CNH 0.94% against the USD with the weaker greenback acting as an additional tailwind for the Yuan.
  • The moves come amid reports that community covid testing can be dropped for those not needing to venture outside. This comes a day after officials in the city of Guangzhou, "announced late on Tuesday they would allow close contacts of COVID cases to quarantine at home rather than being forced to go to shelters", according to Reuters.
  • Swiss CPI, US Core PCE Price index and ISM Manufacturing PMI headline the data docket on Thursday before Friday’s non-farm payrolls report.
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