FX Update: US CPI jitters as cycle status should take precedence. FX Update: US CPI jitters as cycle status should take precedence. FX Update: US CPI jitters as cycle status should take precedence.

FX Update: US CPI jitters as cycle status should take precedence.

Forex
John Hardy

Head of FX Strategy

Summary:  Today’s US CPI number shouldn’t receive the degree of focus that it is getting, but recent upward revisions of prior data and the first print today using a new calculation methodology have the market a bit on edge, when really the more important matter at hand is whether the forward inflation outlook could shift due to a reaccelerating economy. USD charts are in limbo after a solid correction on the recent jump in US treasury yields.


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FX Trading focus: CPI – uncertainty on the release itself as well as the reaction function. USD in technical limbo, but complacency seems high, given treasury yields. RBA Governor Lowe’s future in doubt?  Strong UK jobs data.

Today’s January US CPI release is the talk of the town due to the recent upward revisions of data that have spooked the market on whether it provides further ammunition for even more than the two 25 basis point hikes that are already priced in for the Fed for coming meetings. As well, today’s CPI release will be the first using the new calculation methodology, with impacts far from clear, especially as consumption patterns that affect the weightings (now revised according to one year’s data rather than two years’) might be skewed from heavy shift in patterns from the pandemic “bullwhip” effects. Conspiracy theorists will have us believe that the new methodology is meant to suppress inflation numbers from here. Regardless, we remain on the decelerating inflation path and marginal surprises shouldn’t matter, but may do so, given the tension in this market as complacency feels widespread while US Treasury rates have backed up considerably and we have the risk suggested by some of the most recent data that the economy may be reaccelerating, which would drive a new round of inflation risks in the months ahead. My update on Friday asked what a “no landing” scenario looks like and it certainly doesn’t look like the current heavily inverted yield curve – a growth acceleration with anchored long rates would be a very strange beast.

All of the above does little to inform us what the surprise side of the data is today or how the market will react to it. If the inflation data surprises soft, we may get an explosion higher in sentiment and sharply weaker US dollar, but the market may quickly calm as it recognizes the uncertainties of where we are in the cycle (for example, what to do with if we see a particularly strong US January Retail Sales print tomorrow). Another interesting incoming macro indicator could also come with today’s earnings report from AirBnB after the market close – if they report strong results and a strong outlook, it would be hard to square with an economic slowdown. The travel company Expedia reported strong demand in January relative to 2019 levels. The reaction function is a bit more straightforward with broadly higher than expected CPI data if the release continues to drive a lifting of the entire US yield curve and pushing those Fed rate cuts further over the horizon and the terminal rate higher this year.

Vice Chair Brainard, nominally the most important dovish voice at the Fed is set to leave the Fed after Biden appointed her as Director of the National Economic Council. This isn’t creating much of a furor, as Chair Powell’s voice was always the most important.

Chart: EURGBP
EURGBP has been trying to post a reversal after the episode above 0.8900 failed to find additional momentum, but hasn’t quite sealed the deal, needing perhaps a close below 0.8800 to more fully neutralize the former uptrend, though it already looks rather heavy here. The UK reported very strong jobs numbers this morning, with the ranks of payrolled employees expanding 102k in January versus 15k expected and the January jobless claims far lower at -13k while December claims were revised to -3.2k versus the original +19k reported. The UK economy certainly seems in a less parlous state than feared, with a similar positive shift in the outlook in Europe and the US. Sterling can outperform broadly as long as risk sentiment is able to positively absorb an improving economic outlook without higher yields derailing the situation (i.e., a “no landing” scenario that somehow remains reasonably disinflationary – not sustainable beyond the near term in our view.)

Source: Saxo Group

The JPY edged higher on the confirmation that Kazuo Ueda is now the official nominee to replace Kuroda at the helm of the BoJ upon his exit in early April. More should emerge with confirmation hearings for Ueda Former vice finance minister Sakakibara, dubbed Mr. Yen for his power to move the JPY back in the late 90’s said that the BoJ policy rate will likely achieve lift-off in Q4 and that USDJPY could move toward 120. He leaned on the view that the Japanese economy is at risk of becoming overheated.

Note that Riksbank governor Thedeen will testify today on the economy and monetary policy after last Thursday’s watershed Riksbank meeting.

Finally, RBA Governor Lowe was criticized for a closed-door meeting with bankers two days after the most recent and surprisingly hawkish RBA meeting on February 7. He is suffering political heat on the move and has not even spoken in public since mid-December as the RBA rarely speaks after its monthly rate announcements. A deputy governor of the RBA pulled out of a similar meeting planned for tomorrow. Lowe’s seven-year term will run out this September, with his two predecessors having received a three-year extension of their terms. Treasurer Jim Chalmers has said that any decision on Lowe’s future will be considered after a review of the RBA is delivered to his office on March 31. This could eventually heat up speculation of who will replace Lowe. The RBA chief will be in the hot seat tonight at a Senate hearing.

Table: FX Board of G10 and CNH trend evolution and strength.
Trending intensity is very weak across the board, with SEK sticking out the most among G10 currencies after the Riksbank meeting last Thursday, while Gold is weak on the recent backup in sovereign bond yields. Let’s see if today’s US CPI release can spark anything new from the US dollar as it sits in limbo after a bullish reversal within an overall bear-trend context.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The NZD is a bit lower in places on a soft consumer inflation expectations survey that has lowered RBNZ expectations overnight after their recent sharp rebound. The stronger SEK is making its presence felt (note USDSEK – very heavy looking chart if USD fails to get a bid over next two sessions). And finally, the back up in yields and stronger risk sentiment helping some of the JPY crosses back into positive (weaker JPY) – note AUDJPY and EURJPY.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1100 – US Jan. NFIB Small Business Optimism
  • 1330 – US Jan. CPI 
  • 1400 – Sweden Riksbank Governor Thedeen to speak
  • 1430 – US Fed’s Barkin (Non-voter) to speak
  • 1600 – US Fed’s Logan (Voter 2023) to speak

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