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Market news

Daily finance news update


King dollar breaks down as markets stabilise

January 13,2022 07:53:31

Overnight Headlines

*Asian shares trade mixed as investors digest US inflation surge

*Fed officials set sights on March rate hike and at least two more in 2022

*China lending data spurs policy easing expectation

*Dollar trades heavy around 95 on DXY, below key support

USD fell sharply across the board immediately after the inline US CPI was released. The DXY weakened a further 0.74% after the 0.38% drop a day earlier, hitting its lowest level since early November last year. USD/JPY fell 0.7% to 114.52, its largest drop since late November. EUR strengthened to 1.1446, just above declining trendline resistance. USD/CAD fell to the 200-day SMA at 1.25, AUD rose to the 100-day SMA at 0.7288 and NZD to the 50-day SMA at 0.6855.

US equities opened higher and remained choppy through the session following the CPI data. They closed modestly in the green with the S&P500 up 0.3% and the Nasdaq 100 rising 0.38%. Asian trading is calm though some shares are being dragged lower by weakness in Chinese data.

Market Thoughts –Multi-decade CPI is broad

Well, US CPI was at its highest in nearly 40 years, but wider markets were barely shaken. It seems traders feared an even hotter number. Stocks didn’t flinch while bond yields fell but have stabilised overnight with the 10-year US Treasury at 1.75%.

The figures themselves show that high prices are broad on any measure. Exclude outliers, look at trimmed averages, strip out the weirdest effects of the pandemic and all the figures show highly durable inflation. Shelter inflation which accounts for a third of the index, is at its highest in 14 years and has topped 4%. These costs are a major headwind for any hopes that headline prices will drop in short order.

Some analysts do think inflation might be starting to peak. Used cars and trucks should drag the index down in due course, so too gasoline. Business surveys look less damning now. But Fed Fund futures have barely moved, leaving a first rate hike in March still fully priced.

Chart of the Day – DXY falls below trendline support

The strong selloff in the dollar was the (only) most notable feature after the CPI report. The Bloomberg broad dollar index suffered its worst daily decline since last May. Only one day in 2021 saw the dollar fall as much as yesterday.

The dollar is counter-cyclical which falls as the world economy recovers. Probably a better reason for the big drop is simply the combination of another really bad inflation number and a nonchalant bond market response. This was enough to knock the overbought dollar down.

The 50-day SMA at 95.85 was broken on Tuesday. The 95.51/96.93 range seen since late November was smashed yesterday as prices moved below long-term trendline support at 95.05. Next support is the 100-day SMA at 94.65 and the October high at 94.56. Prices are not yet oversold on the daily RSI.

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