Dollar surged overnight, partly as traders added bet of another aggressive rate hike by Fed next week, and partly on deep risk aversion. Though, there is no follow through buying in Asia, as the greenback is now consolidating gains. On the other hand, Yen appears to be talked up by Japanese officials, and reports that BoJ is checking rates for intervention. Commodity currencies are currently the worst performers while European majors are mixed.

Technically, Dollar has yet to prove it’s ready to resume recent up trend. Key levels to watch include 0.9863 support in EUR/USD, 1.1404 support in GBP/USD, 0.6698 support in AUD/USD, 144.98 resistance in USD/JPY and 1.3207 resistance in USD/CAD. These levels have to be taken out with some conviction to confirm underlying strength in Dollar.

In Asia, at the time of writing, Nikkei is down -2.69%. Hong Kong HSI is down -2.45%. China Shanghai SSE is down -1.03%. Singapore Strait Times is down -1.17%. Japan 10-year JGB yield is up 0.0079 at 0.253. Overnight, DOW dropped -3.94%. S&P 500 dropped -4.32%. NASDAQ dropped -5.16%. 10-year yield rose 0.0060 to 3.422.

Markets pricing in 35% chance of 100bps Fed hike next week

US stock tumbled sharply overnight as traders added bets on another aggressive rate hike by Fed on September 21, next Wednesday. The moves came after stronger than expected consumer inflation data. DOW ended down -1276 pts, or -3.94% while S&P 500 fell -4.32%. NASDAQ suffered most by closing -5.16% lower.

Fed fund futures are now fully pricing a 75bps hike, comparing to 91% a day ago, and 73% a month ago. Indeed, there is even 35% chance of a 100bps hike.

10-year yield surged to as high as 3.458 before closing at 3.422. It’s still more likely than not for 3.483 high to exert strong resistance to limit upside. Break of 3.176 support will suggest that TNX is extending the corrective pattern from 3.483 with another falling leg. However, strong break of 3.483 will resume medium term up trend. And that could take USD/JPY through 144.98 towards 1998 high at 147.68.

Japan officials toughen up talks on Yen

Top Japanese officials toughened up the talks on Yen, as it tumbled notably again overnight following US CPI data. Finance Minister Shunichi Suzuki said Japan wouldn’t rule out any response if current trends in the foreign exchange market continued, with intervention as an option.

The comment was echoed by top current diplomat Masato Kanda, who reiterated, “we are monitoring yen moves with a sense of urgency. We will respond appropriately to currency moves without ruling out any options.”

Chief Cabinet Secretary Hirokazu Matsuno also said at a briefing that the government would take necessary action should excessive yen moves continue. He added that rapid currency moves were undesirable.

On the data front

New Zealand current account deficit narrowed from NZD -6.50B to NZD -5.22B in Q2, versus expectation of NZD -4.70B. Japan machine orders rose 5.3% mom in July, much better than expectation of -0.6% mom decline. Industrial production was finalized at 0.8% mom in July.

Looking ahead, UK CPI and PPI are the major focuses in European session. Eurozone will release industrial production. Later in the day, US will publish PPI while Canada will release manufacturing sales.

USD/CAD Daily Outlook

Daily Pivots: (S1) 1.3027; (P) 1.3101; (R1) 1.3249; More…

USD/CAD rebounded strongly after dipping to 1.2952, but stays below 1.3207. Intraday bias remains neutral first. On the upside, decisive break of 1.3222 will resume larger up trend from 1.2005. Next target is 100% projection of 1.2005 to 1.2947 from 1.2401 at 1.3343. On the downside, however, break of 1.2952 will extend the corrective pattern from 1.3222 with another falling leg, back towards 1.2726 support instead.

In the bigger picture, down trend from 1.4667 (2020 high) should have completed at 1.2005, after defending 1.2061 long term cluster support. Rise from there should target 61.8% retracement of 1.4667 to 1.2005 (2021 low) at 1.3650. This will remain the favored case now as long as 1.2516 support holds.

Economic Indicators Update