Headlines

*Dollar hits fresh peak against the yen on bets for aggressive Fed

*Fed’s Barkin warned that rates must stay high until inflation eases

*UK’s Truss to step back from early confrontation with Brussels

*Asian stocks, currencies fall as strong data fans rise in Treasury yields

USD further extended its 20-year high. Upside has been fuelled by gains in yields and strong ISM data. EUR has dropped under the 0.99 handle with yesterday’s fresh low at 0.9863. GBP eventually gave way to the firmer greenback after spiking above 1.16 yesterday. This week’s low is at 1.1443. USD/JPY printed fresh 24-year highs with this morning’s top at 144.38. NZD is testing the 0.60 level. AUD is eyeing up the July low at 0.6685.

US equities were pressured as traders returned from the Labor Day holiday. Selling pressures from last week continued due to ongoing energy woes and in anticipation of hawkish central bank activity. The small-cap Russell 2000 was worst hit, selling off by 1% with the Nasdaq down 0.72% and S&P500 off 0.4%. The Vix ticked higher again ending the day close to 27. US futures are in the red while European futures are down close to 1% this morning.

Market Thoughts – Volatility increasing as September kicks in

Seasonal studies show that August and September combined represent the worst two-month run for US equities over the course of the year. Trends do then suggest that risk appetite typically rebounds significantly in the final quarter of the year. But market breadth indicators for US stocks have been deteriorating after the rebound in markets through June and July. This leaves roughly four weeks or so for the prospect of weak equities and higher volatility.

Global equities were down for the eight day in a row. The MSCI World has fallen nearly 10% since the peak less than a month ago. Higher yields probably hastened the sell-off yesterday with the upside surprise in the US ISM Services data. The fear of stagflation is shifting further towards the worry of too much demand and recession.

Chart of the Day – USD/CAD pushes into highs

The second of the major central bank meetings this week takes place later today. The Bank of Canada is expected to hike rates by 75bps taking rates to 3.25%. This comes after July’s 100bp surprise move. Inflation remains too high, though economic activity has started to moderate. It is a statement-only affair, so we won’t get much colour. Does the BoC now become more cautious as we move into neutral/restrictive territory? Or is there still more work to be done?

USD/CAD is finding support on dips. The shooting star last Thursday will be negated if we break 1.3207. Above here is the July high at 1.3237. Support is 1.3076.  Watch oil too as Brent may be breaking lower through the recent support at $91.11.