US Dollar Surge Threatens APAC Trading as China Lockdowns Weigh on Risk Assets

US Dollar Surge Threatens APAC Trading as China Lockdowns Weigh on Risk Assets

US Dollar, DXY, China, Australia, Covid Lockdowns, Energy, Technical Outlook – Talking Points

  • US stocks fall overnight, setting the stage for APAC stocks to open lower
  • Australia’s second-quarter GDP and China’s August trade balance due out
  • DXY approaches the 2002 June high as RSI enters overbought conditions

Wednesday’s Asia-Pacific Outlook

US stocks fell overnight after rosy US economic data supported further Fed tightening. The benchmark S&P 500 lost 0.41%, while the tech-heavy Nasdaq-100 Index fell 0.72%. A surge in Treasury yields weighed on markets as chances for a 75-basis point FOMC rate hike increased in swap markets. The FOMC blackout period starts this Saturday.

The Institute for Supply Management’s non-manufacturing purchasing managers’ index (PMI) for August supported a hawkish Fed path. The services sector PMI increased to 56.9, up from July’s 56.7 and beating the 55.1 consensus forecast. The ISM cited increases in new orders, employment and business activity for the improvement. The 10-year Treasury yield rose more than 10-basis points (bps) during New York trading hours, pushing the rate to the highest since June.

The Japanese Yen came under heavy pressure. USD/JPY saw its biggest daily gain since early August. Japan’s July coincident and leading economic indexes for July are due today at 05:00 GMT. And tomorrow, its second-quarter final GDP reading will cross the wires, along with August bank lending data. The Japanese Yen is trading at its weakest level against the Dollar since 1998.

A drop in the Chinese Yuan was another USD driver. The USD/CNH rate is approaching 7.000, a level not traded at since July 2020. The People’s Bank of China’s daily Yuan fix on Tuesday beat analysts’ expectations for the 10th consecutive day. Earlier this week, the Chinese central bank eased rules that dictate the number of foreign exchange reserves banks must hold, trimming the level to 6% from 8%. That ought to boost the onshore supply of USDs. Today’s Yuan fix may be surprisingly strong, given the overnight action.

The Australian Dollar also fell victim to the Treasury-yield-charged US Dollar despite the Reserve Bank of Australia (RBA) hiking its cash rate to 2.35% on Monday. Australia’s second-quarter GDP growth rate is set to cross the wires today, with analysts expecting a 3.5% y/y increase. The RBA chart pack is also on tap. Covid lockdowns in China are weighing the Aussie Dollar down. On Monday, Guizhou’s capital city, Guiyang, prompted by increasing Covid cases, announced lockdowns for over half of its population. Chengdu in Sichuan province extended restrictions for its 21 million residents. China’s trade data for August, scheduled for a 03:00 GMT release, is expected to drop to $92.7 billion.

US Dollar (DXY) Technical Outlook

The DXY rose to a fresh yearly high overnight. The Relative Strength Index (RSI) is tracking higher and entered overbought conditions, showcasing the strength of the move. Prices are contending with a previously supportive trendline, but a break above the June 2002 level is more likely to provide a trigger for the next run higher. The nearby 161.8% Fibonacci extension from the July-August move may provide a layer of confluent resistance.

DXY Daily Chart

Chart created with TradingView

— Written by Thomas Westwater, Analyst for

To contact Thomas, use the comments section below or @FxWestwater on Twitter

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