The US dollar drops from $94.50 resistance level after the release of the FOMC minutes
Economic data is not good currently and it seems that the FOMC is going to press on with their tapering idea in November. Whether the market will welcome this is to be seen, it could already be priced in. This leaves the slowdown in economic activity and that for me is due to a reduction in the fiscal flows. Higher prices for PPI due to supply chain disruptions have also equated to higher CPI with the confluence of higher energy prices. If Oil markets come back to full supply and logistical bottlenecks reduce, the inflation story will disappear.
Market Brief
In its Labour Force Report for September 2021, the Australian Bureau of Statistics released employment, unemployment, underemployment, participation, and hours worked data. During the past month, the unemployment rate increased to 4.6% and it is well documented that the coronavirus outbreaks across metropolitan areas have been the main disruption. The participation rate decreased to 64.5%, and employment fell to 12,884,600 which is now becoming a trend to the downside and will become a problem if it persists much longer.
Despite the labor force data, the Australian dollar appreciated against the US dollar for the 4th consecutive day. It is likely to find the 0.7430 level sticky as the daily 200 ema is currently there and that has proven to be dynamic resistance in the past.
Out earlier today the National Bureau of Statistics reported that China's consumer price index (CPI) increased by 0.7% on an annual basis in September, missing estimates.
The year-over-year figure is down from last month's reading of 0.8%. However, the August reading didn't change much from the previous month's reading. Clearly, since May the inflation increases have been reducing as COVID-19 and its variants continually flare up and their overleveraged industries begin to fall apart. Additionally, the country's producer price index (PPI) grew at its fastest rate since 1995, jumping 10.7% over last year's figures.
As the country prepares for its general election, Prime Minister Fumio Kishida dissolved the upper house of the country's parliament. "I want to use the election to tell the people what we’re trying to do and what we’re aiming for," Kishida told reporters.
In the overnight session, Japan's Ministry of Economy, Trade, and Industry (METI) announced the country's industrial production index for August was 94.6 points, 3.6% lower than last month. The industrial output rose by 8.8% year over year. The shipment index increased by 7.2% year over year, while inventories dropped by 3.7%. Inventory ratios declined by 10% when compared with last year's reading.
The yen continues to depreciate against the US dollar and is removing liquidity from above multiple swing highs from the descending channel. A move above 114.50 and there will be a clear run-up towards 118.00 and major resistance.
As investors digested the US Federal Reserve's meeting minutes from its latest meeting, which indicated that a reduction in bond purchases could begin as early as November the markets moved towards a more risk-on sentiment. The Chinese yuan and Japanese yen are clearly suffering due to the worsening economic data but the move out of the US dollar is being pushed into the commodity pairs.
The Eurodollar futures bounced off their lower trend line from the descending channel which could see US rates start to fall from recent highs. The widely watched US10Y-US2Y rates spread has also started to show signs that the interest rates are likely to move lower, which is a positive for the US debt holders who will see treasuries and bonds rising
but also explains why the US dollar index was unable to trade beyond the $94.50 level. It could be that investors are also worried about a possible export of deflation from China and that the US CPI of 5.4% could be the peak. President Biden has asked ports to ramp up their hours to clear the backlog of goods waiting to be unloaded from ships, which could result in the supply chain problems easing. Nobody wants empty shelves at Christmas.