The DXY Index ended Tuesday barely changed at 102.54 after trading below and above Monday’s range of 102.37-102.62. DXY initially fell to a low of 102.29 during the Asian session and rose to 102.64 during the European session before ending the US session at 102.54. Despite the futures market withdrawing bets for another 50 bps cut at next month’s FOMC meeting, the US Treasury 2Y yield eased, for the first time in five sessions, by 3.7 bps to 3.958% after failing to break above 4% on Monday.
Fed officials looked past last Friday’s better-than-expected US jobs data and affirmed the two cuts pencilled in previous month’s Summary of Economic Projections. Today’s FOMC Minutes should echo New York Fed President John Williams’ confidence that inflation was moving towards the 2% target because the US economy and the labour market were getting back in balance, allowing interest rates to move towards a neutral setting. Minneapolis Fed President Neel Kashkari estimated the neutral rate to be close to 3%, where we see the Fed Funds Rate falling to next year from today’s 5%.
Hence, all eyes are on tomorrow’s US CPI inflation, which consensus sees slowing to 2.3% YoY in September from 2.5% in August. The Fed should be comfortable with 0.1-0.2% MoM readings for headline and core inflation. Gold fell a fifth day by 0.8% to USD2622/oz, breaking below its two-week range between 2625 and 2686, losing some lustre as a hedge against inflation.
Crude oil prices fell throughout Tuesday from China’s disappointing stimulus announcement eclipsing fears of a broader conflict in the Middle East. Returning from its Golden Week holiday, the Shanghai Composite Index opened 10% higher in anticipation of more fiscal stimulus. However, the gains were trimmed to 4.6% when the outcome fell short of expectations. Brent fell 4.6% to USD77.18/barrel, erasing Monday’s 3.7% rise to 80.93. While oil prices have risen from the year’s low, they are still below levels a year ago, another reason why the Fed is not overly worried about inflation.
All said, until the sentiment-driven market aligns with the Fed’s underlying outlook for lower inflation and interest rates, currencies are likely to lack direction from markets over-reacting to better- or worse-than-expected data.
Quote of the Day
“A mind is like a parachute. It doesn’t work if it isn’t open.”
Frank Zappa
October 9 in history
The first US underground pipeline for carrying oil was laid in Pennsylvania in 1865.
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