USD: Only short-lived weakness

The dollar started the week back yesterday, failing to rise following a further sell-off of shares, and suffering from OPEC + ‘s decision to stick to incremental increases in supply (400 000 barrels / day) which sent oil prices (and oil-sensitive currencies) higher. As pointed out in yesterday’s FX Daily, we believe markets will continue to buy dollar declines, and this appears to have happened overnight as the greenback rebounded across the board. .

News that another Chinese real estate developer, Fantasia, failed to repay $ 205 million in bonds on Monday, also contributed to some demand for safe-haven, raising concerns that problems in China’s real estate sector could spread. well beyond Evergrande. As a result, the Chinese dollar high yield bond segment fell around 4 cents today, the biggest drop since 2013, and is now increasingly being watched as a benchmark to determine how much of the problems of the real estate sector are reflected in Chinese financial markets. .

In the end, it’s likely a remnant that the headwinds against risk sentiment emanating from the Chinese real estate sector are far from over. On FX, we believe this will continue to provide reasons not to turn lower on the dollar, while the high beta currency segment might not move as a single block as some currencies may rely on a certain amount. protection offered by soaring energy prices.

In this sense, the divergence between the two closest peers, the AUD and the NZD, is quite central this week, as the two currencies also deal with the decisions of the national central banks. The RBA announced its policy this morning and, as widely expected, followed through on its previous pledge to keep its monetary tools unchanged until February. The Bank simply reiterated that it remained committed to supporting the economy and that it does not expect the conditions for a tightening to be in place until 2024. The RBNZ rate announcement is tonight, and we expect a 25bp hike: we discuss this in more detail in the NZD section below. The policy divergence between the AUD and the NZD might make it difficult to drive the AUD / NZD down significantly in the short term as: a) the AUD, unlike the NZD, can benefit from the energy crisis discourse; b) the positioning on the AUD / NZD is strongly biased in net short territory.

Returning to the dollar, we will look for some consolidation in the dollar rebound overnight. On the data side, markets are expecting a decline in ISM services read today, and any upside surprises could offer additional support to the dollar as it strengthens the case for a Fed cut, although that employment data later this week should play a big role. more important role. The DXY climbed back above 94.00 this morning and may remain above that level that day.

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