- Although European data indicates that inflation accelerated in September, the jump was mainly due to fuel prices with the core read basically unchanged
- It is unlikely that this higher headline read will go far in persuading the ECB that the inflation outlook remains weak
- In our view there is a low probability that the ECB will make any announcement of changes to the current monetary policy strategy at this week’s meeting
- EURUSD next support is located at 1.0950 but unlikely to be challenged ahead of the ECB meeting and press conference
- We believe that the Fed’s target of 2% is actually too low. The Fed needs much higher inflation in order to kill the US government’s massive debt and we believe that this inflation is now coming
- The BoE is prepared to let inflation go higher to support economic growth
Risk appetite came back marginally in the Asian session. Yet overall volumes and directional momentum was lacking. In FX, USD was slightly weaker against the G10 and EM with the AUD and NZD leading currencies higher. Most of Asia was higher with the Shanghai composite 0.5%, Hang Seng 0.9% and ASX up 0.4%. US treasuries were slightly lower with US 10 year yields down to 1.77%, while two years closed at 0.817%. Not much change but allowed for FX, which is now highly correlated, to put USD on the back foot. USDJPY was range bound in low volume trading between 103.70 and 103.95.
Japanese Finance Minister Aso reiterated the corporate BoJ line stating that central banks are watching FX moves carefully, indicating that excessive volatility could damage the economy. In New Zealand Q3 CPI rose 0.2% from 0.4% in Q2, while non-residents holding for government debt fell to 61.9% in September from 63.5% in August. The CPI read did little to shift the markets expectation for a RBNZ rate cut in November. NZDUSD rallied to 0.7190 from 0.7128 with bullish traders targeting 0.7202 Oct high.
In Australia, RBA Lowe provide balanced comments yet the threshold of another interest rate cut feels high. Lowe indicated that the benefit from an ultra loose monetary policy globally was losing benefits, while the RBA current poly mix was working well and comfortable with the level of AUD. Lowe suggested that the Q3 CPI read out next week will be important for rate setting and that the RBA needed to protect inflation expectations from falling to low. AUDUSD was able to rally to 0.7676 from 0.7624 on the comments.
European data indicated that inflation accelerated in September. However, the jump was mainly due to fuel prices with core read basically unchanged. It is unlikely that this higher headline read will go far is persuading the ECB that the inflation outlook remains weak. In our view there is a low probability that the ECB will make any announcement of changes to the current monetary policy strategy at this week’s meeting. EURUSD was range bound, dipping to 1.0995 then firming back to 1.1060. Support is located at 1.0950 but unlikely to be challenged ahead of the ECB meeting and press conference.
Yann Quelenn, market analyst: “US: Inflation on the rise: Today, the September US CPI Urban Consumers is expected to print higher at 0.3% m/m versus 0.2% m/m a month previous The annualised data is expected to surge to 1.5% y/y. It has been a year since the core inflation has reached the Fed’s target of 2% and we now believe that Urban Consumer inflation is on its way higher. Janet Yellen also declared last Friday that it would be wise to consider the benefits of a “high-pressure economy”.
And this is exactly what the Fed needs. From our vantage point, it is clear that the Fed’s target of 2% is actually too low. The Fed needs much higher inflation in order to kill the US government’s massive debt and we believe that this inflation is now coming. This also explains why the Fed had been so reluctant to raise rates over these past few years.
This statement from Janet Yellen was not the only one. The BoE also, according to Governor Mark Carney, is prepared to let inflation go higher to support economic growth. The reality here is that central banks needs a strong differential between nominal rates and real rates to kill countries’ massive debts.
Today we will closely monitor any inflation development and we feel that this uptrend is only the beginning.” ----
Today, markets will focus on UK and US inflation reads.