FX FX FX

FX Update: US CPI in focus. China caps CNY advance.

Forex 5 minutes to read
Strats-Hardy-88x88
John Hardy

Head of FX Strategy

Summary:  China moved to stem further advances in its currency a day after the yuan traded to sharp new highs for the year against the US dollar, suggesting it would like a halt to its appreciation. This helped boost the US dollar ahead of the November CPI print later today, which is the last major data release ahead of a pivotal FOMC meeting that will see the most major guidance shift since the outbreak of the pandemic.


FX Trading focus: China moves against strong CNY. USD eyes CPI

China suddenly moved against the CNY strength yesterday, first announcing an increase in the required FX reserve ratio for domestic banks and then setting the yuan fix far weaker than expected. This came the very day after USDCNY and its offshore equivalent USDCNH slipped to new lows for the year beyond those established back at the end of May. The timing is not to be second guessed here as China clearly wants to put a ceiling on its currency here, a move that also comes as the official CNY basket has risen to the highest levels since it was defined in late 2015. With this signal, many will be happy to assume that China wouldn’t mind some further mean reversion in its currency and for USDCNH to drift back toward the summer range highs of 6.50 at minimum. Relief on the commodity inflation front (at least crude oil) may be behind some of the move, as well as an attempt at slowing speculative inflows linked to its shift to a policy easing stance.

The modest pump higher in EURUSD on Wednesday now appears clearly inspired by that last leg down in USDCNH, just as yesterday’s sell-off in EURUSD fit with the move by Chinese regulators that sharply reversed the USDCNH move. After this adjustment, further downside in EURUSD will likely require new highs for Fed expectations, which are pushing on the highs of the cycle ahead of US data and next week’s FOMC meeting.

Elsewhere, the focus is squarely on the US November CPI release later today, which is expected to eclipse the highest levels of the early 1990’s and post the highest level since 1982 at 6.8% year-on-year for the headline and an approximately 30-year high at the core of 4.9%. In a curious development, US White House economic adviser Brian Deese was out attempting damage control on this number even before the release, saying that the inflation data today won’t take into account falling prices for key commodities like gasoline and natural gas. The desperation is certainly on show.

In today’s Saxo Market Call podcast, we noted once again that the University of Michigan sentiment survey suggests a very unsettled consumer, where it unprecedented to have very low unemployment numbers (normally confidence is more linked to the availability and security around employment) with very low confidence. According to the UMich survey, sentiment levels are back near the bad phase of the post-financial crisis months of 2009. In looking into why this survey is so dramatically at odds with the Conference Board Consumer Confidence number, which has only dipped slightly of late, I suspect that it is some of the questions in the UMich survey that are not in the Conference Board survey that may be driving this remarkable divergence. Those surveyed in the UMich are asked about “personal finances” and especially “buying conditions”, two areas that have not doubt deteriorated badly on the breakout in inflation. The Conference Board survey is more focused on employment.

Chart: EURUSD
Watching Fed rate expectations in the wake of today’s US CPI release for how the market treats EURUSD here, where the last couple of sessions have likely been buffeted by sharp swings in USDCNY as noted above. The EURUSD slide has largely tracked the widening short yield differential between the two currencies, and the last major wave lower that broke down through 1.1500 materialized in the wake of the October CPI release on November 10. Whatever the level of the US CPI data today, we’ll likely need new cycle highs in short US rates to get EURUSD below the sub-1.1200 lows and on the path toward 1.1000 ahead of the FOMC meeting next Wednesday, when the market will get a sense if it has adjusted sufficiently to the new focus on inflation at the Fed.

10_12_2021_JJH_Update_01
Source: Saxo Group

Next week’s Economic Calendar
Next week is a busy one, to say the least, and mostly on the central bank front with the US FOMC Meeting up on Wednesday, and the SNB, Norges Bank, ECB, BoE and Norges Bank on Thursday. We’ll preview the FOMC, ECB and BoE meetings further next week, as all of them look pivotal. Norges Bank forecasted a hike next week long ago – guidance the focus there. The Bank of Japan will meet on Friday amid expectations of a tapering of some of its corporate bond QE. The Russian Central Bank also meets Friday and is expected to hike another 100 basis points to take the rate to 8.50% after core CPI for November rose to 8.7% year-on-year and 1.14% month-on-month, the highest since 2015.

On the economic data front, we have the US Retail Sales up on Wednesday, with preliminary PMI’s from all major economies on Thursday.

Table: FX Board of G10 and CNH trend evolution and strength
The coming few days through the FOMC meeting critical for the USD outlook after support came in for the greenback yesterday. CNH is likely done for the cycle in terms of its broad strength, as noted above after the signal from regulators.

10_12_2021_JJH_Update_02
Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Individual pairs for reference below – as we have noted recently, the “energy level” across FX is quite high in terms of daily trading ranges (the color of the ATR in orange and bright orange), although interesting to note the exceptions like EURGBP (very quiet), GBPUSD, EURUSD and USDCNH notwithstanding last few days. Note USDCHF trying to flip back higher after its recent sell-off.

10_12_2021_JJH_Update_03
Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1300 - Poland National Bank of Poland meeting minutes 
  • 1330 – US Nov. CPI 
  • 1500 – US Dec. Preliminary University of Michigan Sentiment 

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.