USD Soars Amid Hawkish Fed Expectations, Yen Refreshes Multi-Decade Lows

Hawkish Fed musings provided the initial boost to the greenback, sending it to the top of the G10 scoreboard. Demand for the U.S. dollar was amplified by subsequent risk-negative signals. The BBDXY index punched through Wednesday's peak and the 1,300 mark to print its best levels since Jul 14, when it lodged the most recent cyclical high.

• Market sentiment was fragile from the off, as headwinds for the tech sector weighed on U.S. e-mini futures. An unexpected contractionary reading of China's Caixin M'fing PMI helped discourage participants from taking on more risk. In the final blow to sentiment, China locked down Sichuan's capital city Chengdu in response to the local outbreak of COVID-19.
• The news about Chengdu lockdown inspired a fresh leg higher in USD/CNH amid a broader round of risk-off flows. This frustrated the PBOC's efforts to lean against yuan depreciation via its USD/CNY mid-point fixings.
• The People's Bank delivered a stronger than expected fixing for the seventh consecutive day, this time setting the reference rate 103 pips below the sell-side estimate. Some speculated that the PBOC may have adjusted its fixing formula (counter-cyclical factor) without announcing it publicly.
• Hawkish Fed positioning delivered a fresh blow to the yen, with USD/JPY running to Y139.68, its highest point since 1998, which brings the psychological Y140.00 figure into view. The move prompted Japan's MoF to warn against abrupt moves in the exchange rate, to no avail. With the spot rate piercing recent cyclical highs, one-month risk reversal moved above par. Although renewed risk aversion provided some reprieve to the broader yen, USD/JPY stabilised near session highs.
• PMI readings from across the globe will keep hitting the wires today, with EZ unemployment as well as U.S. jobless claims & construction spending also eyed. The central bank speaker slate features Fed's Bostic, ECB's Centeno, Norges Bank's Bache & Riksbank's Ingves.