FX Analysis – USD continues decline on dovish Fedspeak, JPY outperforms, AUD and NZD breakout

USD continued its recent decline on Tuesday with the US dollar index (DXY) hitting its lowest level since mid-August at 102.60 before finding some support at the 61.8 Fib level.  The decline accelerated after voting Fed member Waller who is seen as a hawk, made some dovish remarks regarding rates and inflation namely he was “increasingly confident” policy is well positioned to slow the economy and get inflation back to 2%, he also hinted at rate cuts next year if inflation and the economy continued on its current path. There were also some comments from Fed member Bowman which skewed hawkish, but as she is already considered a hawk there wasn’t a comparable market reaction as to the Waller comments.

Chart Source:TradingView.com

JPY was the G10 outperformer benefitting the most from USD weakness and lower US Treasury yields that saw the US 10 year and JGB 10-year yields compress further. USDJPY hitting a low of 147.32 and testing the November lows and support level at 147.27. Today the BoJ’s Adachi is due to speak ahead of a raft of Japanese data released during the remainder of the week.

Chart Source:TradingView.com

AUDUSD and NZDUSD both hit 3-month highs of 0.6665 and 0.6147 respectively, with broad USD weakness and a risk-on market supporting both cyclical currencies. Strength in the commodity markets and recent hawkish comments from RBA governor Bullock also lending a tailwind to AUD. Both currencies come into Wednesday with key economic readings to navigate, with Aussie CPI, where a drop to 5.2% Y/Y from 5.6% is expected, and a RBNZ rate decision due. The RBNZ is widely expected to hold rates at 5.50% so it will be the forward guidance kiwi traders will be watching closely.

Chart Source:TradingView.com