US FX WRAP: Dollar flat despite softer-than-expected PPI
USD was little changed against major peers on Thursday. A softer-than-expected PPI release saw bets on a Fed hold over a hike increase in response. However, USD held up despite the move lower in US 2yr yields, helped by the elevated geopolitical risk environment. Separately, weekly initial claims rose more than expected; however, current levels of around 200k remain unalarming. Meanwhile, Fed speak saw Hammack post PPI reiterate calls for rate hikes whilst Barkin remains uncertain on the future path of policy. DXY sits around 99.950, firmer from the WTD open of 99.590.
EUR and CAD were marginally firmer vs USD, whilst NZD and CHF continued to lag, albeit by small magnitudes. For NZD, 2yr inflation expectations in Q3 eased to 2.3% from 2.5%. Meanwhile, an in-line UK GDP reading (+0.4%) was met with a muted reaction in GBP/USD, which currently trades around 1.3487.
USD/JPY continues to hover on the 159 handle, now trading at 159.49. Today’s main update was a Bloomberg report that Japanese PM Takaichi’s government is said to support a faster BoJ rate hike.
EUR/NOK & USD/NOK are little changed from the levels seen before the Norges Bank decision to hold rates at 4.25% as expected. The CB kept the door open for further hikes in the future if needed. Focus turns to the next MPR and any accompanying adjustment to that guidance.
Sessions in which a soft inflation print fails to weaken the dollar fit a recurring pattern: the yield channel and the haven channel pull in opposite directions, and the latter has tended to dominate when geopolitical risk is elevated. The detail that 2yr yields fell while DXY held is the tell, since in quieter environments a PPI miss plus a dovish rates repricing has typically been sufficient to drag the dollar, particularly against low yielders. The split among Fed speakers matters more than any single comment: one official reiterating hike calls while another professes uncertainty is the signature of a committee without a centre of gravity, and in past episodes of this kind the data, rather than the rhetoric, has ended up setting the front end. On the crosses, the Norges Bank hold with a hiking bias left the krone's fate to the next projection round, which is where guidance of this kind has historically been hardened or walked back. The reported Japanese government backing for a faster BoJ exit is the more consequential thread, as political cover for tightening has in previous cycles preceded actual moves, and USD/JPY pinned on the 159 handle keeps intervention optics in frame given the Ministry of Finance's prior form at elevated levels. Near-term follow-ons are the next round of Fed speak for consolidation around either view, and any official commentary out of Tokyo.