FX Daily: Resistance to Dollar Strength is Futile
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FX Daily: Resistance to dollar strength is futile
The dollar remains well-bid across the board as a relentless run of above-consensus US data suggests the Federal Reserve will be in no mood to relax its hawkish stance. Resistance to the strong dollar is crumbling - most notably in China where a higher USD/CNY fixing suggests the People's Bank of China is becoming more tolerant of renminbi weakness.
USD: No reason to unwind dollar longs
The dollar is consolidating near the highest levels since March as US data continues to surprise on the upside. Following the above-expected ISM Services index on Wednesday, yesterday it was the turn of the weekly initial jobless claims to drop back to the lowest levels since February and question the narrative that tightness in the US labour market is easing. With activity data staying strong, it seems the market may be more minded to buy into the idea of another 'skip' - i.e. the Fed not hiking in September but hiking again later in the year. Clearly, this pushes the idea of a Fed easing cycle later and keeps the dollar stronger for longer.
As has been the case so often, the dollar is the United States currency and everyone else's problem. Here, both Japanese and Chinese officials are fighting against dollar strength - with limited degrees of success. Japanese officials are sounding like we could well see intervention shortly - e.g. in the 148-150 window in USD/JPY.
The highlight of the overnight session, however, has been the People's Bank of China (PBoC) allowing a higher fixing in the onshore USD/CNY. They have maintained the spread of the fixings to the model-implied fixings of around 1100 CNY pips, but the higher fixing has put paid to ideas that Chinese officials have some kind of line in the sand for USD/CNY at 7.35. USD/CNH is currently trading above that level. Low Chinese CPI next week and a PBoC rate decision with the one-year lending rate will keep expectations alive of further rate cuts too. The weaker CNY/CNH will continue to keep EM FX broadly offered and the dollar bid.
There is very little in the way of US speakers or US data today. The weekend sees a G20 meeting in New Delhi, with much focus on how new alliances develop following the recently announced expansion plans of the BRICS.
We cannot see investors wanting to offload dollar balances anytime soon. This suggests DXY stays bid near 105.00.
