The US dollar continued to surge against its major counterparts on Tuesday, largely driven by the heightened anxieties surrounding China's economic trajectory after the subpar results from the Caixin services PMI, triggering a rush towards the safety of the dollar. Particularly impacted by this trend were the Australian and New Zealand currencies, given their robust trading connections with China, the world's second-largest economy. Simultaneously, the Japanese yen struggled amidst widening yield differentials, fueled by the rise in US Treasury yields juxtaposed against the Bank of Japan's hold on Japanese government bond (JGB) yields, leading to a surge in the dollar/yen ratio.
Dollar/Yen Flirts with a Key Threshold
For the first time since last November, the dollar/yen pair concluded Tuesday above the 147 threshold. This spike resulted in an assertive intervention warning from Japan’s Vice Minister of Finance for International Affairs, Masato Kanda. Emphasizing the necessity of currency movements mirroring underlying economic fundamentals, Kanda declared that speculative activities would not go unchecked, signaling potential measures.
The yen tumbled to a ten-month low following this, and as the currency edged close to the 148 mark, a pullback ensued. This retraction might be attributed to Kanda's statements urging traders to rethink their short yen strategies. The coming days will reveal whether traders will venture further, risking potential intervention, or adopt a more cautious stance, mirroring the earlier prudence seen in July when the dollar/yen neared the 145 mark.
ISM's Non-Manufacturing PMI: The Next Catalyst
While concerns over China's economic performance remain a significant influence, they're not the sole drivers of the dollar's momentum. Recent PMI revisions in the Eurozone heightened global recession concerns. Simultaneously, a spike in oil prices may nudge traders to reevaluate the potential for another Federal Reserve rate hike, anticipating forthcoming inflationary pressures.
While the prevalent sentiment suggests that the Fed might maintain its stance in the imminent meeting, a November rate adjustment is currently estimated at a 45% likelihood. The upcoming ISM non-manufacturing PMI, set to be unveiled today, will be keenly observed. Forecasts hint at a marginal downturn, but preliminary indicators from S&P Global suggest a sharper decline. Depending on these outcomes and related subindices, especially concerning persistent inflation, the US dollar and Treasury yields might continue their upward trajectory.
Wall Street Wavers, Bank of Canada to Make its Move
Yesterday witnessed Wall Street's leading indices retracting, a testament to the diminishing risk appetite. The current trajectory hints at this trend prolonging, particularly if the ISM PMI propels the possibility of an additional Fed rate adjustment. Nevertheless, with substantial rate reductions anticipated throughout 2024, this might be a short-lived correction, making way for a more sustained upward trend.
Additionally, the spotlight today also shines on the Bank of Canada's policy announcement. Despite the prevalent anticipation of a steady stance from the Bank, the rising oil prices suggest that completely shutting down further rate hikes might be premature. Given that the likelihood of an imminent rate hike is pegged at a mere 35%, any proactive indications from policymakers might offer a respite for the beleaguered Canadian dollar.
