There is a huge caveat to this week’s currency point and that is the announcement of the next Fed Chair. According to most sources, it’s down to two – Jay Powel and Lael Brainard.
Why this is a caveat is that if the President was to change the head of the Board to Lael Brainard FX markets would flick around as they digest a dovish head with a slant for high regulation and more stimulus. It will be a catalyst for movement and volatility – be aware of the risks.
However, looking at US data as it stands and we cannot ignore just how strong it is. Here is just some of what happened last week to go with the 30 year high in inflation and the growth to match.
- US weekly initial jobless claims at 268,000 at pre-pandemic levels
- Philly Fed business outlook, jumping to 39.0 compared to estimates of 24.0 and last month’s 23.8. Strong recovery here. The big drive was the price – “prices paid” equalled the recent record high, “prices received” rose to the highest since 1974. The commentary in the release made this statement – [the economy] “continues to overheat”.
- US retail sales for October up 1.7 per cent, smashing expectations of the prior read of 1.4 per cent and 0.8 per cent respectively, its the largest monthly gain since March. The drivers: rising prices and increased demand, a shift in holiday sales.
Industrial production in October rose 1.6 per cent, also smashed expectations and the prior month of 0.9 per cent and -1.3 per cent respectively. It too was the largest monthly gain since March. The rise takes production back above pre-pandemic levels.
Yet interestingly enough none of this really moved the dial in US rates. Yields fell slightly and there is a sense the market is consolidating, possibly waiting for the Fed announcement as new catalysts to move price action. 2-year yields are holding at 0.50 per cent, and 10-year yields dropped back from 1.61 per cent to 1.59 per cent. So not data dependant yet.
The USD however is moving on it – particularly against pairs that are having further issues with COVID.
EUR/USD hit $1.1320, a 16-month low last week, it rebounded half a cent to close the week out, however, the more the 4th wave hits Europe the bigger the discrepancy in economic rebound there will be.
GBP/USD range-bound around $1.3500 but GBP is failing to recapture the excitement of the BoE despite very high inflation read.
USD/JPY rose marginally to ¥114.25 with help from the news on fiscal support, the pair remains in a very strong up channel – it’s been an incredible run.
AUD/USD hit a new one-month low of $0.7250 has rebounded. However, the dovish RBA coupled with falling iron ore prices and a growth differential in the US’ favour suggest in the
short term the AUD is likely to feel the pinch.