- US dollar still trading higher against most currencies due to boosted bets that the Fed will modestly hike interest rates before the end of the year
- The very low interest rate environment, coupled with a relatively strong job market, has created the perfect conditions for a real estate bubble and the Fed will definitely not be turning a blind eye to this issue
- USD/ZAR: Due to increasing speculation that the Fed will tighten, the currency pair is definitely subject to upside risk where a resistance can be found at 14.23, while on the downside, a support area lies at around 13.00
In Asia, equity returns were mixed in spite of a solid session in Wall Street on Tuesday. Japanese stocks ended however in positive territory, boosted by a slightly weaker yen. The Nikkei 225 rose 0.56% and the broader Topix index was up 0.73% as USD/JPY tested the 100.52 level in Tokyo. In mainland China, stocks have been moving back and forth around the zero line. In Europe, equity futures are trading in negative, pointing to a lower open.
Overnight, the US dollar was trading higher against most currencies as traders boosted bets that the Fed will modestly hike interest rates before the end of the year. The probability of a move in September, extracted from the fed funds futures market, increased to 28% overnight amid better-than-expected new homes sales. US new home sales rose to a 9-year high in July, up 12.4%m/m to a 654k annualised figure, widely beating the expected 2% contraction. The very low interest rate environment,coupled with a relatively strong job market have created the perfect conditions for a real estate bubble and the Fed will definitely not turning a blind eye. However, as in other countries, such as New Zealand and Australia, there are various ways to address this issue; interest rate tightening is not the only one.
The market is becoming increasingly nervous about Yellen’s upcoming speech on Friday at Jackson Hole after several Fed members, including Vice Chairman Stanley Fischer, released some hawkish comments, suggesting that the Fed was on its way to finally pushing the button. The greenback has been on a rollercoaster for the last week as investors still doubt a strong consensus amongst Fed members. This morning, the dollar index edged up 0.15% to 94.66 after hitting 94.21 yesterday. The market will therefore be particularly sensitive to the key US data that is due to be released before Friday.
In South Africa, the rand took a massive hit against the greenback yesterday, after speculations that Finance Minister Pravin Gordhan may be relieved from office after rumours he had been summoned by police. USD/ZAR surged more than 5% over the last 24 hours to 14.1379, the highest level since July 29th, as South African 10-year treasury yields surged more than 50bps (9%) amid a wide sell-off in sovereign bonds. With increasing speculation that the Fed will tighten, the currency pair is definitely subject to some upside risk. On the upside, a resistance can be found at 14.23 (50dma), while on the downside a support area lies at around 13.00 (previous low and psychological level).