Currency Point: All road lead to the USD (again)

What a crushing read October’s CPI print was. There is now no getting around the fact the US consumers are now actually seeing real-life price increases that took years in a matter of months.

All had forecasted that energy would go to surge in the read was significantly stronger there than expected. If we look at energy prices in the US over the past 4 months, it is up over 30 per cent. The annual pace of US inflation is tracking at its fastest rate in 30 years at 6.2 per cent. Food too is outstripping expectations. Meat, poultry and fish are up to some 15% in the past two months – these are hip pocket expenses that are tangible to the average American consumer.

But even when you strip out energy and food from the CPI read a 4.6 per cent is still pretty eye-watering for all. The reacceleration in used cars, tobacco and medical is well ahead of expectation. Then there are new cars – prices are growing at the fastest pace since 1975. This is in the main down to supply chain bottlenecks and elevated demand. But there are few signs that the energy price pressure and discretionary price crunches will abate any time soon.

The list of questions for the Fed from last week’s CPI is getting bigger by the day but there are few that stand out.

1. Will they accelerate the taper program to end it sooner than forecasted?
2. Will they change their views that inflation is transitioning to a structure issue?
3. Will ‘lift off’ be brought forward to 2022 rathe rather than 2023?

The market is certainly asking these questions. Looking at the belly of the US bond curve underperformed the outer ends. 2-year yields rose from 0.43 per cent to 0.51 per cent while 5-year yields rose from 1.08 per cent to 1.22 per cent. The 10-year rose from 1.46 per cent to 1.58 per cent. Interestingly though US real yields are still at their lowest since the 1940s.

Cash is losing value hand over fist.

But, in a world where higher rates ‘could be’ possibility, money flows fast – and that is why the USD is back in vogue.

EUR/USD fell from $1.1590 to around $1.1415 – the first time it’s been below $1.15 since July 2020, the weakness persisted into the weekend.

GBP/USD fell like a stone down 1.5 cents or -1.1 per cent, to $1.339, the lowest read since December 2020.

USD/JPY remains on point with our playbook from a few months ago – and that is to follow US yields. Pair moved from ¥112.80 to ¥113.90 then on to ¥114.69 its highest read since March 2017 its ease slightly to ¥114.24 but the trend is strong with this one.