US Dollar direction to dictate market sentiment as APAC markets eye green open

US Dollar, DXY, Market Sentiment, CPI, China, Technical Outlook – Talking Points

  • Asia-Pacific markets set to open further as traders look to extend gains on dollar weakness
  • China’s Covid lockdowns threaten to restore market sentiment if restrictions increase
  • The DXY index accelerated lower on Friday and prices could fall further if a key SMA gives way

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Monday’s Asia-Pacific Outlook

Asia-Pacific markets set to open higher as traders look to extend gains from last week, when a weaker US dollar encouraged traders to buy stocks and others risky assets. The greenback fell despite rate traders raising their bets for a 75 basis point rise at the September FOMC meeting. The driving story sees the Fed slowing its pace of tightening after the next meeting, which should slow the exodus from Treasuries and help temper the rise in yields.

China, however, poses a risk to market sentiment. The country is undergoing its widest lockdown measures yet as policymakers try to stamp out virus surges. A highly transmissible strain and an under-vaccinated population, especially among the elderly, inspires little confidence in a rapid resolution. Moreover, the upcoming National Congress in October, when President Xi is expected to secure an unprecedented third term, makes a change in government policy all the more unlikely.

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China’s consumer price index missed estimates last week, largely thanks to falling pork prices. This could give the People’s Bank of China (PBOC) more policy space, but a yuan close to level 7 poses its own challenges for the central bank. China last week cut the number of reserves most banks must hold by 2%, but the impact was negligible.

The Japanese yen is closer to possible market intervention after Bank of Japan Governor Haruhiko Kuroda and Prime Minister Fumio Kishida met to discuss the currency’s extraordinary weakness. The island nation’s ultra-loose monetary policy, protracted debt levels and high energy costs are weighing on the yen. The United States remains opposed to Japanese intervention in the foreign exchange market. Nonetheless, the yen caught a bid as traders speculated on the possibility of tail risk. However, if Japan decides to intervene in the currency, it could backfire and cause a flood of capital outflows, even with its large reserves.

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13 Sep

(02:09 GMT)

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US Dollar Technical Outlook

The U.S. dollar accelerated lower on Friday, snapping a three-week winning streak. As prices hit a new high in 2022 earlier this week, bulls struggled to clear a trendline from May. The Relative Strength Index (RSI) has fallen below the overbought level of 70 and is heading towards its midpoint, which may encourage further selling. Prices failed to hold below the 20-day simple moving average on Friday, but a break lower would potentially threaten the August low.

DXY Daily Chart

US dollar chart

Chart created with TradingView

— Written by Thomas Westwater, Analyst for DailyFX.com

To contact Thomas, use the comments section below or @FxWestwater on Twitter

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