Fed Lifts Dollar

Overview: The US dollar rallied after the Federal Reserve signaled that a majority are inclined to reduce the pace of bond purchases this year, even though the short-end interest rate markets took it in stride. Follow-through buying pushed the euro and the Australian and New Zealand dollars to new lows for the year. The Swiss franc and Japanese yen are more resilient. Emerging market currencies are under pressure, led by South Africa, Turkey, and Poland. The JP Morgan Emerging Market Currency Index is lower for the fourth consecutive session and about 1% this week. Equity markets are tumbling. The S&P 500 lost 1% yesterday and is off over another percent today. Asia Pacific equities fell hard, led by Hong Kong, South Korea, and Taiwan. Of note, New Zealand bucked the trend and rose almost 1.9%. Europe's Dow Jones Stoxx 600 is off almost 2% today, its biggest loss in a month, but the weekly slide could be the largest since February. The US 10-year yield is near 1.23%, down three basis points. European core bond yields are softer, while the peripheral yields are a little firmer. After a soft employment report, Australia's 10-year benchmark yield fell about six basis points to dip below 1.08%, a new six-month low. Gold is recovering from follow-through selling that had pushed it to a $1774.5 low and is back near $1788. Oil prices slid yesterday, with the September WTI contract falling to a three-month low below $65, and it is off another 3.3% today around $63.25, after falling to almost $62.8.It is the sixth consecutive losing session for crude, during which time it is off around 10%. US oil inventories fell more than expected, and the level is the lowest since January 2020. However, while the decline in stocks should be supportive of prices, news that gasoline inventories rose for the first time in a month warned that demand may be flagging, which dovetails with other reports suggesting a decline in auto traffic and air travel here in August. Copper, iron ore, steel are lower as well.  

Asia Pacific

Australia's jobs data was poor even though it showed a net gain of 2.2k jobs and the unemployment rate falling to 4.6% from 4.9%. The survey period was July 4-17. The impact of the lockdowns in Sydney and Melbourne is likely to impact the August and potentially the September reports. The decline in the unemployment rate to its lowest level since December 2008 mostly reflects the decline in the participation rate (66.0% vs. 66.2%). Also, even though employment rose (part-time +6.4k and full-time -4.2k), hours worked fell by 0.2%. Meanwhile, Australia reported a new record of daily cases of covid.  

While China appears to continue pursuing "wolf diplomacy" in its own neighborhood, its domestic crackdown is broadening. Ironically, like many western leaders, Xi appears to be concerned about the concentration of wealth. The emerging slogan is "common prosperity."There are references to reasonable adjustments of excessive incomes. This could result in some capital flight, but it may be difficult to isolate it from the broader strength of the US dollar and the efforts to discourage investment in China by the US from both Beijing's actions and official discouragement by the US.  

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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