Head of FX Strategy
Summary: The US dollar was largely quiet yesterday, with FOMC minutes confirming the general hawkish lean from the Fed, even if these saw a discussion of an eventual deceleration in tightening, something the market expects will unfold early next year anyway. But the JPY was quite weak across the board, taking USDJPY to new highs since the late 1990’s ahead of today’s event risk of the week, the US September CPI release, which may have a hard time moving the needle.
FX Trading focus: US CPI on tap. GBP focus beyond Friday.
Traders finally abandoned their fear of official Japanese intervention took USDJPY more firmly higher yesterday, to for the cycle since the 1990’s, even as US treasury yields remained tame. Elsewhere, the USD action was generally muted as EURUSD is finding the 0.9700 area sticky and GBPUSD bobs around near 1.1100, with the market mulling what will happen after the Bank of England halts its emergency QE measures, supposedly on Friday.
The next event risk is the September US CPI release later today and whether it moves the sentiment needle on any sharp new move in US treasuries, where yields have consolidated below the cycle highs of two weeks ago and near 4.00%. Judging from the last CPI release in September, where the hotter than expected core data jolted the market and sent the USD higher, we might expect that any surprises could move the market sharply. But in the intervening time frame, we have to remember that the September FOMC meeting spelled out for the first time in the Fed projections that the rate tightening regime was forecast to continue even as inflation is expected to slow considerably and unemployment to rise. The worst surprise for markets and aggravator of the USD rally would be a strong core print of 0.5% or higher.
The FOMC minutes released late yesterday showed that “Many participants emphasized that the cost of taking too little action to bring down inflation likely outweighed the cost of taking too much action.” This was not read as a huge surprise by markets, as Fed rhetoric has consistently pointed in that direction and the market expectations for Fed policy finally now reflect the Fed’s own “dot plot” trajectory of forecasts, in which rates are expected to end next year slightly higher than where they are seen ending this year. Previously, the market had persisted with the view that the Fed would blink at the first sign of trouble and cut rates quickly (note comments on September FOMC above ending that narrative). Still, there was a note of caution in the minutes as “ Several participants observed that as policy moved into restrictive territory, risks would become more two-sided, reflecting the emergence of the downside risk that the cumulative restraint in aggregate demand would exceed what was required to bring inflation back to 2 percent.” But that is already why the market is expecting less than 50 basis points of further tightening beyond the December FOMC meeting, so it is already “in the price”. Late yesterday, Michelle Bowman of the Fed’s Board of Governors argued for continued large rate increases and the early November FOMC meeting is nearly fully priced to deliver a 75 basis point hike, with December’s meeting priced at 50-50 odds of 50 vs. 75 basis points.
Chart: EURGBP
Watching GBP pairs into the end of this week and early next week as the Bank of England still claims that it will wind down its emergency QE tomorrow, while the FT has cited discussions among those in the know that believe the Bank will have to extend its operations. An interesting sign of scapegoating from UK Chancellor Kwarteng, who commented on the sidelines of a conference in Washington that any turmoil in the UK gilt market next week would be the BoE’s fault – an ugly scapegoating move. Two things are notable here: first, that the longer UK gilt yields rose yesterday back to where they were during the worst of the market disorder a couple of weeks ago even as the emergency QE is ongoing. And second: GBP has rebounded quite smartly today as yields have come back sharply lower from yesterday’s highs. At some point, isn’t this ironic? I.e., strong QE driving yields lower and a currency in a world where central banks are tightening and in the Fed’s case, doing QT. We won’t know the lay of the land until early next week – for now, watching GBPUSD and EURGBP closely. The 0.8850+ area in the latter suggests sterling stress, while 0.8575-0.8625 was the important zone on the way up.
Sweden’s CPI hits new cycle highs in September This shows how the energy crisis in Europe and the weak krona continue to drive higher inflation, even as headline inflation levels in the US, for example, rolled over after the June peak. The headline Swedish September CPI released this morning hit 10.8%, above the 10.5% expected and up from 9.8% in August, while the core inflation level rose to 7.4%, slightly below the 7.5% expected, but up from 6.8% in August.
Table: FX Board of G10 and CNH trend evolution and strength.
The GBP status is uncertain after the huge pump back higher from the recent downdraft – still see the government having to go back on its fiscal plans as the necessary ingredient for GBP recovery (or some miracle that brings energy prices back to normal levels). Aussie remains down and out as the worst performer on RBA dovishness, and perhaps as a proxy for CNH concern – note USDCNH hitting 7.20 this morning.
Table: FX Board Trend Scoreboard for individual pairs.
AUDNZD has capitulated well down through the key 1.1250 level, confirming a new down-trend, with the next big focus into the 1.1000 area. EURGBP is trying to reverse course – better ability to assess early next week.
Upcoming Economic Calendar Highlights
The end of the road
Emboldened by surging crude oil prices, Saudi Arabia makes waves on the international stage, as Crown Prince Mohammed bin Salman manages to create a World Champions League, after buying the UEFA Champion League franchise.
As the world embraces GLP-1 obesity wonder drugs, the people next in line to get a prescription stop caring about dieting and exercising, figuring that the drug will later solve all of their weight-related health problems.
With the US budget deficit spiraling above 10% of the GDP, the government is desperate to foster demand for US Treasuries. Under intense pressure from the White House, Congress makes income from government bonds tax-free.
After a criminal group deploys the most deceptive AI deepfake ever seen, generative AI becomes a national security threat. With public distrust soaring, governments crack down with harsh new laws, puncturing the AI hype.
To fix the divergence in the global trade and financial system, the largest deficit countries unite to negotiate new world trade terms. For surplus countries, the reset of the global economic model is a painful adjustment.
As discontent with Biden and Trump rises to fever pitch, Robert F. Kennedy Jr sees his support rising inexorably in the polls. On November 5, Kennedy wins the US presidential election, ushering in a new era in US politics.
Stepping up Japan's economic transformation in 2024, PM Kishida brings in a host of populist policies to boost domestic demand. As the GDP growth rate hits 7%, the BoJ is forced to abandons its yield curve control policy.
As people wake up to how little tax Europe’s billionaires are actually paying, the EU Commission implements a wealth tax of 2%. The tax sends shockwaves through Europe's luxury industry, with luxury giant LVMH plunging 40%.
