FX Update: Big reaction in rates to CPI fails to impress AUD
Summary: A solid beat in the Australian CPI reading overnight saw a huge adjustment to the forward rate curve in Australia but failed to impress the currency as much as other factors are providing some offsetting pressure. Today we look forward to a Bank of Canada meeting that will have to deliver a guidance shift to meet market expectations for rate moves in the first half of next year, and a huge hike in Brazil is expected as the central bank there will counter inflationary Bolsonaro welfare largesse.
FX Trading focus: Aussie rates jolt on CPI, UK fall budget statement and Bank of Canada dead ahead
The Aussie traded a bit firmer overnight after the release of the Q3 Australia CPI data. The headline numbers were +0.8% QoQ and +3.0% YoY versus +0.8%/3.1% expected, respectively, but the “Trimmed Mean” received more attention as it came in at +0.7% QoQ and +2.1% YoY vs. +0.5%/+1.8% expected. Interestingly, while rates reacted violently to this development – sending terminal 2022 expected rates more than 25 basis points higher, the Aussie reaction was muted – sticking a bit higher versus the weakest G10, but sharply lower this morning again from overnight highs versus the US dollar and especially the Japanese yen.
It is a very loud grinding of the gears for an analyst to see a move like that overnight and to see AUDJPY tumbling sharply this morning after such an adjustment to the RBA expectations curve. Metals prices dropping of late and extending lower still overnight, not to mention a partial collapse in Chinese thermal coal prices after a recent major spike, may be contributing factors, just as declining long yields this morning are putting some overdue pep in the yen’s step as the last sell-off over-reached relative to developments in global fixed income. As well, we have end of month coming up on Friday after a historically bad month for the JPY and a Bank of Japan meeting tonight, so some of this is likely simply an adjustment of near-term stretched positioning and a dose of rebalancing. Nonetheless, it is a remarkable development and we’ll have to see how the price action picks up on the first of the month on Monday to see in hindsight whether this is a one off consolidation. For now, the lid remains on AUDUSD as long as recent highs to the 0.7600 area hold as well.
UK Fall Budget Statement up today. I have covered this in my previous update, but the general outlines here are that Chancellor Sunak is looking to cut outlays wherever he can while announcing a flurry of measures that nonetheless don’t add up to much. The fiscal deceleration could weigh on sterling from here, and expectations of a Bank of England rate hike at next Thursday’s Bank of England meeting have pulled back a tad further – now just barely above 50/50 odds of a move. Watching 1.3650-1.3600 as the key pivot zone that divides a simple “further consolidation” scenario from the risk of a new rout back to the lows of the cycle. GBPJPY, given the above, may prove higher beta this week to sterling direction, given the comments above.
Chart: AUDJPY
Despite the Q3 Australian CPI overnight triggering a major repricing of even 2022 rate expectations from the RBA (25 bps higher by end of next year relative to before the release), the Australian dollar was unable to hold its rally overnight and was especially weak this morning against a resurgent Japanese yen, which has likely risen on the factors mentioned above. Plenty more room for a sharp consolidation into month-end if safe haven yields push lower still, but given the scale of the recent JPY sell-off, it would take some doing to reverse this recent rally, perhaps a move all the way back below the 200-day moving average, currently near 82.65.
Bank of Canada meeting later today. This meeting will feature a new set of forecasts for the economy, including inflation, and a press conference with Governor Macklem. No rate hike expected as the guidance at the previous meeting repeated the July policy assessment, which anticipated that the Canadian economy still has significant excess capacity and that the time frame for hiking rates won’t arrive until the second half of next year. But the time frame of the rate hike guidance could be pulled forward (hawkish) with the market already predicting a hike as early as the March or April meeting, so a repeat of the “second half of 2022” time frame would be nominally dovish. CAD is soft ahead of the meeting.
Significant Brazil rate hike anticipated tonight – The exploding Brazilian budget deficit on new welfare spending initiatives, likely not coincidentally ahead of an election set for October of next year, together with much higher than expected inflation (October CPI reported at over 10% year-on-year) has the market anticipating a large rate hike of some 150 basis points to take the Selic rate to 7.75%. The Brazilian real has weakened toward the range high this year in USDBRL near 5.80 before a slight strengthening as the Brazilian Central Bank is under pressure to defend the value of the currency. At the same time the political situation is getting toxic as president Bolsonaro has vowed that “only God can take me from presidency” and a number of Senators are trying to indict the president on charges of crimes linked to his handling of the pandemic even one for “crimes against humanity”.
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FX Trading focus: Aussie rates jolt on CPI, UK fall budget statement and Bank of Canada dead ahead
The Aussie traded a bit firmer overnight after the release of the Q3 Australia CPI data. The headline numbers were +0.8% QoQ and +3.0% YoY versus +0.8%/3.1% expected, respectively, but the “Trimmed Mean” received more attention as it came in at +0.7% QoQ and +2.1% YoY vs. +0.5%/+1.8% expected. Interestingly, while rates reacted violently to this development – sending terminal 2022 expected rates more than 25 basis points higher, the Aussie reaction was muted – sticking a bit higher versus the weakest G10, but sharply lower this morning again from overnight highs versus the US dollar and especially the Japanese yen.
It is a very loud grinding of the gears for an analyst to see a move like that overnight and to see AUDJPY tumbling sharply this morning after such an adjustment to the RBA expectations curve. Metals prices dropping of late and extending lower still overnight, not to mention a partial collapse in Chinese thermal coal prices after a recent major spike, may be contributing factors, just as declining long yields this morning are putting some overdue pep in the yen’s step as the last sell-off over-reached relative to developments in global fixed income. As well, we have end of month coming up on Friday after a historically bad month for the JPY and a Bank of Japan meeting tonight, so some of this is likely simply an adjustment of near-term stretched positioning and a dose of rebalancing. Nonetheless, it is a remarkable development and we’ll have to see how the price action picks up on the first of the month on Monday to see in hindsight whether this is a one off consolidation. For now, the lid remains on AUDUSD as long as recent highs to the 0.7600 area hold as well.
UK Fall Budget Statement up today. I have covered this in my previous update, but the general outlines here are that Chancellor Sunak is looking to cut outlays wherever he can while announcing a flurry of measures that nonetheless don’t add up to much. The fiscal deceleration could weigh on sterling from here, and expectations of a Bank of England rate hike at next Thursday’s Bank of England meeting have pulled back a tad further – now just barely above 50/50 odds of a move. Watching 1.3650-1.3600 as the key pivot zone that divides a simple “further consolidation” scenario from the risk of a new rout back to the lows of the cycle. GBPJPY, given the above, may prove higher beta this week to sterling direction, given the comments above.
Chart: AUDJPY
Despite the Q3 Australian CPI overnight triggering a major repricing of even 2022 rate expectations from the RBA (25 bps higher by end of next year relative to before the release), the Australian dollar was unable to hold its rally overnight and was especially weak this morning against a resurgent Japanese yen, which has likely risen on the factors mentioned above. Plenty more room for a sharp consolidation into month-end if safe haven yields push lower still, but given the scale of the recent JPY sell-off, it would take some doing to reverse this recent rally, perhaps a move all the way back below the 200-day moving average, currently near 82.65.
Bank of Canada meeting later today. This meeting will feature a new set of forecasts for the economy, including inflation, and a press conference with Governor Macklem. No rate hike expected as the guidance at the previous meeting repeated the July policy assessment, which anticipated that the Canadian economy still has significant excess capacity and that the time frame for hiking rates won’t arrive until the second half of next year. But the time frame of the rate hike guidance could be pulled forward (hawkish) with the market already predicting a hike as early as the March or April meeting, so a repeat of the “second half of 2022” time frame would be nominally dovish. CAD is soft ahead of the meeting.
Significant Brazil rate hike anticipated tonight – The exploding Brazilian budget deficit on new welfare spending initiatives, likely not coincidentally ahead of an election set for October of next year, together with much higher than expected inflation (October CPI reported at over 10% year-on-year) has the market anticipating a large rate hike of some 150 basis points to take the Selic rate to 7.75%. The Brazilian real has weakened toward the range high this year in USDBRL near 5.80 before a slight strengthening as the Brazilian Central Bank is under pressure to defend the value of the currency. At the same time the political situation is getting toxic as president Bolsonaro has vowed that “only God can take me from presidency” and a number of Senators are trying to indict the president on charges of crimes linked to his handling of the pandemic even one for “crimes against humanity”.
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.
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