US
USD is up against all major currencies. EUR is underperforming as French and Italian bonds lead the renewed sell-off in global bonds. The rally in stocks stalled and Brent crude oil prices recovered back above $100 a barrel.
IMF Managing Director Kristalina Georgieva warned that the problem of high energy prices would likely persist for some time despite the recovery of oil flow out of the Gulf. First, the global shortfall in refining capacity is keeping diesel and other fuel prices high relative to crude. Second, natural gas supply from the Gulf remains severely impaired by limited LNG transport options. Finally, inventory rebuilding and winter demand risk adding further pressure.
Bottom line: persistently high energy prices keep risks to inflation, policy rates, and benchmark bond yields skewed to the upside, while favoring energy exporters’ currencies and USD over energy importer’s currencies. US growth outperformance and strong foreign appetite for US securities give USD an added boost.
The September New York Fed consumer survey is up next (4:00pm London, 11:00am New York). The survey should continue to show that longer term inflation expectations remain anchored.
The September 15-16 FOMC meeting minutes (7:00pm London, 2:00pm New York) are likely to look somewhat dated after recent calls for patience from key Fed officials (Williams, Jefferson, and Bowman). Recall, the FOMC’s September hike came with a clear hawkish tilt and unanimous backing.
JAPAN
USD/JPY is firmer near its 200-day moving average at 158.52 on broad USD strength. Japan August labor cash earnings data does not point to an accelerating wage inflation spiral. That keeps the bar high for a more aggressive BOJ tightening cycle and leaves USD/JPY likely to trade within a 155.00-160.00 range in the near term.
Total nominal wage growth eased less than expected to 3.8% y/y (consensus: 3.7%) from a downwardly revised 4.3% in July. The less volatile scheduled pay growth for full-time workers unexpectedly slowed to 2.8% y/y (consensus: 2.9%) vs. 2.9% in July.
SWEDEN
USD/SEK is firmer on broad USD strength. Sweden September CPI was mixed. CPIF matched consensus and Riksbank projection at 1.5% y/y vs. 0.7% in August. CPIF ex-energy was cooler than anticipated at 0.5% y/y (consensus and Riksbank projection: 0.7% y/y) vs. 0.5% in August.
Adjusted for temporary fiscal policy measures, inflation is closer to 2% and keeps a policy rate hike in play. The Riksbank noted in September that “the policy rate should be raised more going forward than projected in the June forecast” and signaled again it expects “the increases to the policy rate will begin this year.”
In the next twelve months, the Riksbank’s policy rate forecast implies over 75bps of tightening to 2.50% while the swaps curve price in over 100bps of hikes to 2.75%. That limits policy divergence with the Fed and is a headwind for USD/SEK.
INDIA
USD/INR rallied 0.5% to 96.85, within touching distance of its May 20 record high of 96.9650. The Reserve Bank of India (RBI) rate hike failed to support INR as its policy guidance suggested limited appetite for aggressive tightening. Still, positive real rates and RBI FX intervention should help contain USD/INR overshoots.
As expected, RBI decided unanimously to raise the policy rate 25bps to 5.50%, after keeping rates on hold at 5.25% the last four meetings. The RBI changed its policy stance from neutral to “calibrated tightening”. But the hawkish signal was diluted because “calibrated tightening” leaves room for either a hike or a pause while the 4-2 vote split - two members (Kumar and Singh) preferred to retain a neutral stance – signals limited consensus for sustained tightening.
POLAND
National Bank of Poland (NBP) is widely expected to keep the policy rate at 3.75% for a sixth straight meeting today. We expect a hawkish hold which can offer PLN support. Inflation in Poland is gaining traction above the bank’s target range and Governor Adam Glapinski Glapinski warned last week that the mood within the Monetary Policy Council is “wintery, hawkish.” The swaps curve implies over 100bps of tightening to between 4.75%-5.00% in the next twelve months.
