Global overnight
The growing consensus that US rates have reached a peak received a boost overnight with a weaker than expected inflation reading adding to the evidence from this month’s weaker US jobs report. A more balanced approach in terms of commentary from the Federal Reserve has also been key to this view. Today, China data is due, while UK inflation is released tonight.
USD smashed after CPI
The US dollar turned sharply lower overnight after US inflation came in well below expectations – adding weight to the view that the US Federal Reserve might have finished raising rates.
US bond yields had the biggest one-day loss in eight months – since the Silicon Valley Bank crisis back in March – as both headline and core inflation came in below expectations. US annual headline inflation was reported at 3.0% (below forecasts for 3.1%) while the core inflation number was at 4.0% (versus 4.1% expected).
US sharemarkets surged with the S&P 500 up 1.9% and the Nasdaq up 2.1%.
The US dollar tumbled with the USD index down 1.6%.
The Australian dollar jumped with the AUD/USD up 1.9% and hitting three-month highs.
The kiwi was the largest beneficiary with the NZD/USD up 2.3% and trading back to one-month highs.
Chinese yuan, emerging FX stronger
The USD/CNH fell 0.6% ahead of today’s critical industrial production, retail sales and fixed asset investment numbers.
We’ve seen a recent small improvement in China’s industrial production and retail sales numbers. Another better number today could boost sentiment further today.
Indonesian trade balance is also due today. This year’s slowdown in Chinese demand is likely to see the Indonesian goods trade imbalance to shrink to USD2.8 billion in October from USD3.4 billion in September.
Export growth is expected to have remained severely negative at -15.6% y-o-y, although up from -16.2% in September. Nonetheless, import growth probably improved to -5.4% y-o-y from -12.5%, in part because of government initiatives to control local food prices by boosting import supplies.
In the short term, emerging market FX is likely to outperform as US bond yields fall and global sharemarkets gain. Over the medium term, we are pessimistic about IDR due to the deteriorating external picture.
UK inflation next
We’ve seen US inflation fall sharply overnight, will the UK follow suit tonight? Lower price caps from regulator Ofgem — paired with significant base effects from the previous year — should be the primary driver of the October CPI inflation decrease.
This will allow household energy prices to deduct about 1.5 percentage points from the headline inflation rate between September and October. The base effects of food prices should also help to reduce headline inflation. In addition, we anticipate that core prices will increase monthly at a slower pace than they did in October 2021 or 2022, which were the fastest-growing Octobers ever for core prices. Briefly put, our expectations are as follows: 1/ headline inflation will decline from 6.7% to 4.7% 2/ services inflation will slightly decline from 6.9% to 6.7% 3/ core inflation will similarly moderately decline from 6.1% to 5.9%
The BoE is somewhat more aggressive than the ECB in terms of monetary policy. Although the UK and the euro area are both experiencing an economic slowdown, we believe that the UK is less likely to have a recession. Overnight, the initial read for EU GDP came in negative, at -0.1% in the September quarter.
Technically speaking, the EUR/GBP pair is now nearing the peak of its range over the last six months, suggesting that a downward move would have a higher risk-reward.
Aussie, kiwi surge on weaker US CPI
Table: seven-day rolling currency trends and trading ranges
Key global risk events
Calendar: 13 – 18 November
All times AEDT
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
