Daily Brief – 2% September

2% September

Yesterday the Dollar capped off its best month since March. The Dollar index closed the month some 2% higher than its opening level in September. The main theme behind that value-shift has been the market’s evolving relationship with the central bank. Before the Federal Reserve’s mid-month quarter-point hike, the market hadn’t believed in the central bank’s commitment to price stability. Put simply, the jury was still out on whether its newly appointed chairman, Kevin Warsh, would bow to the political will of the White House or take action against rising inflation.

The Dollar’s gain month-on-month is a resolution to that debate. That resolution has combined with robust US economic data to leave treasury yields significantly higher today than one-month ago. Higher costs of borrowing are a global phenomenon but exemplified, if not led, by the US market at present. Yesterday the Fed’s preferred measure of inflation, core PCE, was published. Even an underwhelming year-on-year figure couldn’t take the wind out of the sails for long, and the strong-Dollar environment prevailed.

The next major US data event will be tomorrow’s non-farm payrolls data release. Jobs data remains as important as ever to preserving the support case for the US Dollar. The Dollar outperformed all other G10 currencies in September with the exception of the Japanese Yen. Volatile trading, deep-rooted under-valuation and the expectation of intervention from monetary authorities allowed the Yen to endure and exceed gains made within the greenback. The worst performing G10 currency was the New Zealand Dollar, losing almost 5% month-on-month in September struggling with expectations of a pause in its own hiking cycle.

Discussion and Analysis by Charles Porter

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