* China reports fewer Covid cases as blanket testing rules eased
* RBA raises key rate by 25bps, reiterates further tightening to come
* Dollar holds firm on hawkish Fed bets, stronger US data
* Gold sinks on higher yields and USD, faces resistance at 200-day SMA
FX: USD went bid after a hawkish reaction to the ISM Services data which topped analyst expectations. The DXY found support at the August low, rising 0.7% and rebounding from 104.63. US Treasury yields moved higher with the 10-year yield bouncing off the 100-day SMA around 3.50%.
EUR/USD hit 1.0594, a level last seen in June before closing near the low at 1.0491. GBP/USD printed at 1.2344 before settling at 1.2190. USD/JPY was the main casualty from broad dollar strength as it was weaker by 1.8%. It closed at 136.75 from the previous close of 134.31.
AUD has found some support after the RBA hiked by 25bps and signalled further rate hikes ahead. Gold fell back after making a new high at $1810. The precious metal has struggled around the 200-day SMA at $1794.
Stocks: US equities kicked off the week on a sour note with all sectors lower. The S&P500 closed down by 1.79% and the Nasdaqfinished 1.73% lower. The Dow dropped 1.4% as risk-off pushed the VIX above 20.
Asian stocks were mixed with Wall Street headwinds battling with further China reopening efforts. The Hang Seng was choppy, but selling was capped by more downgrading in Covid rules. The ASX 200 was subdued after the RBA delivered an eighth straight rate rise. The Nikkei 225 was kept afloat after BoJ Governor Kuroda reaffirmed sticking with current monetary policy.
US equity futures are slightly softer. European equity futures are lower with the Euro Stoxx 50 future down 0.3%. The cash market closed down 0.5% yesterday.
Event Takeaway – Data (eventually) stokes rate hike fears
In contrast to the strong US jobs data on Friday, the market took a disliking to the ISM service indicator yesterday. Or was it just a delayed reaction to the strong NFP and a WSJ article over the weekend? Yesterday’s data unexpectedly rose in November most likely fuelled by the strong growth in US employment. Notably, the prices paid index remained high despite lower gasoline and oil prices last month. That could point to sticky inflation which is becoming entrenched.
The WSJ article over the weekend by Fed whisperer Timiraos grabbed the attention as well. He warned that elevated wage pressures could lead the Fed to continue increasing rates to levels higher than investors currently expect. The biggest Fed policy mistake would be letting its guard down when it comes to inflation. Money markets price in just the 50bp rate hike for next week’s FOMC meeting. Recent guidance from Fed Chair Powell has been that the central bank will hike in smaller steps going forward. There is currently a 20% chance of another 75bp increase. Traders have added to rate hike expectations further out in 2023. The peak Fed funds rate is back to 5%.
Chart of the Day – AUDUSD may struggleif risk off continues
The RBA hiked rates by another 25bps to 3.10% as forecast. They expect to increase rates further over the period ahead but there is no set path. Inflation is still too high but is seen slowing next year along with growth. The RBA has policy meetings every month, unlike other major central banks, so can take a more data-dependent approach. Jobs numbers and the CPI release later this month will be worth watching.
AUDUSD has perked up today, but the reaction has been relatively contained. There had been the small chance of no move by the RBA. Global risk sentiment and China remain the key drivers for the aussie. Resistance looks heavy around 0.68. July support is at 0.6681 as well as a couple of moving averages. Lose that and bears will target the late November low at 0.6584.