US FX WRAP: Dollar little changed ahead of CPI
USD was little changed on Tuesday as markets await US CPI & PPI over the next couple of days. Key data was absent, leaving the focus on Fed speak and geopolitics. The former continued to show that combating inflation is the main Fed priority; meanwhile, optimism over a reopening of the Strait of Hormuz continues to fade as fresh attacks are seen on ships in both key waterways in the region. Iran maintains that its demands must be met for the Strait to be reopened, posing a greater challenge for the US this time to find resolve when compared to the committments need for the brief reopening seen in June. However, given the increasing correlation between the dollar and short-term Treasury yields, CPI and PPI will hold great influence over USD moves this week.
AUD was slightly firmer vs the buck, helped by a hawkish tilt from the RBA Governor. The central bank kept rates unchanged at 4.35%, as expected. Initial AUD weakness was seen before reversing after Governor Bullock noted they will raise rates if needed and that only a hike or hold was discussed at the meeting. The board judged policy to be somewhat restrictive while inflation remains too high. AUD/USD hit lows of 0.7039 before recovering to 0.7059.
Aside from USD and AUD, currency-specific newsflow was quiet. CAD was slightly fimer, supported by higher oil prices, meanwhile, CHF was slightly weaker. Ahead, the calendar is to remain light; UK GDP due on Thursday and EZ GDP 2nd Est on Friday.
Pre-data sessions of this kind follow a familiar pattern: with the calendar empty, the dollar marks time and positioning is squared ahead of the print, so realised moves are small and headline-driven. The wrap itself flags the operative channel, namely the elevated correlation between the dollar and the front of the Treasury curve, which in past cycles of this sort has meant CPI and PPI do the work that Fed commentary cannot, since remarks from officials tend to confirm the prevailing stance rather than shift the pricing of the path. The RBA episode fits a recurring template for hawkish holds: an unchanged decision produces initial softness in the currency, which reverses once the governor's framing reveals that a hike was live on the table, a sequence seen on previous occasions when a central bank at its terminal rate signals the next move is more likely up than down. The Hormuz strand matters mainly through crude and, by extension, the terms-of-trade currencies, with CAD's firmness alongside higher oil the standard transmission. The light calendar that follows leaves the dollar's near-term direction a function of the inflation prints rather than idiosyncratic G10 newsflow.