Yen Weakens, Sterling Shines on Central Bank Divergence

October 15, 2021
  • September inflation readings were worrisome; September retail sales will be very important; regional Fed manufacturing surveys for October will start rolling out
  • Another BOE official is pushing back against tightening expectations; Europe reported weak September new car registrations
  • Reports suggest that the BOJ will lower its growth and inflation forecasts for FY21 in its upcoming Outlook Report; Australia will allow some international arrivals but the situation remains unclear; China regulators eased restrictions on mortgages for large banks in an effort to soften the blow from the Evergrande fallout; cryptocurrency markets were supported by news that the SEC is set to approve a bitcoin futures ETF as early as next week

The dollar is consolidating its recent gains. DXY is flat today just below 94 and follows two straight down days after posting a new cycle high near 94.56. USD/JPY remains the biggest mover, trading above 114 for the first time since November 2018. The October 2018 high near 114.55 is drawing near, as is the November 2017 high near 114.75. A dovish BOJ and rising 2-year U.S.-Japan differentials remain key drivers. Elsewhere, the euro remains heavy as it tries to gain traction above $1.16. Sterling continues to outperform as BOE lift-off nears and a clean break above $1.3720 sets up a test of the September 14 high near $1.3915. With the Fed ready to taper, markets pricing in Q3 or Q4 22 Fed liftoff, and price pressures still rising, we view this move lower in U.S. rates and the dollar as a correction within the longer-term uptrend.


September inflation readings were worrisome. CPI and PPI readings weren’t as bad as markets feared, but we are nowhere near sounding the all clear for inflation risks. Core PCE has been above the 2% target for five straight months and is nearly double it at 3.6% y/y in August. The Fed isn’t panicking like the BOE, but it is prudently about to remove accommodation soon with an eye towards eventual lift-off, probably in late 2022. Bullard and Williams speak today.

Yet bond yields have softened. The two-year yield rose as high as 0.39% this week but stands at 0.36% now, while the 10-year rose as high as 1.63% but stands at 1.55% now. Some of this can be attributed to foreign demand, as evidenced by strong showings for indirect bidders at this week’s coupon auctions. If wage pressures continue to rise in the U.S. as we expect, the markets will have to reassess the outlook for yields.

September retail sales will be very important. Headline sales are expected to fall -0.2% m/m vs. a 0.7% gain in August, while ex-autos are expected to rise 0.5% m/m vs. 1.8% in August. The so-called control group used for GDP calculations is expected to rise 0.5% m/m vs. 2.5% in August. Recall that August sales delivered a huge upside surprise. October University of Michigan consumer sentiment could help determine if consumption is likely to remain strong in Q4. Headline is expected at 73.1 vs. 72.8 in September.

Regional Fed manufacturing surveys for October will start rolling out. Empire survey kicks things off today and is expected at 25.0 vs. 34.3 in September. This is the very first snapshot for October and the U.S. manufacturing sector enters Q4 with strong momentum despite ongoing supply chain issues. September import/export prices will also be reported, along with August business inventories (0.6% m/m expected). Canada reports August wholesale trade sales (0.5% m/m expected) and September existing home sales.


Another Bank of England official is pushing back against tightening expectations. MPC member Mann said she “can wait” before raising rates because markets have already tightened financial conditions. She joins MPC member Tenreyro in the dovish camp, who earlier this week warned of premature rate hikes in the face of what she sees as transitory price pressures.  Yet these comments had little impact on market pricing, with the short sterling strip still fully pricing in lift-off in Q4 followed by three more hikes in 2022. Next BOE decision is November 4 and WIRP suggests nearly 33% odds of a hike then.

Europe reported weak September new car registrations. They fell -23.1% y/y vs. -19.1% y/y in August and largely reflect ongoing chip shortages worldwide. Overall, recent eurozone data have come in soft and should give the ECB doves cover to push back against the hawks, who want to end accommodation. The public debate continues, with Knot and Wunsch today taking opposite sides. No changes are expected at the upcoming October 28 decision but the policy debate will remain openly on display then.


Reports suggest that the Bank of Japan will lower its growth forecast for FY21 in its upcoming Outlook Report for the October 27-28 policy meeting. However, the bank will also raise its forecast for FY22. The changes would be due to the impact of the extended state of emergency as well as ongoing supply chain shocks. The bank is also likely to lower its FY21 inflation forecast to around 0% from 0.6% previously due to re-basing of the CPI. This would be seen as very a dovish hold this month. FY24 will be added with the April 2022 Outlook Report and is likely to show inflation remaining well below the 2% target, which would mean no tightening until FY25 at the earliest.

Australia will allow some international arrivals but the situation remains unclear. First, incoming New South Wales Premier Perrottet said that starting November 1, fully vaccinated international travelers will no longer need to quarantine in a hotel for 14 days upon arrival. Proof of vaccination and a negative PCR test are still required to enter Sydney, but Perrottet stressed that “For double-vaccinated people around the world, Sydney, New South Wales is open for business. We want people back.” Later, Prime Minister Morrison implied that this would only be allowed for returning citizens. Of note, all interstate borders to NSW will remain closed. As of this writing, we are awaiting further clarification. Despite the mixed signals, the return of international arrivals will eventually happen and that’s a positive step for the nation.

China regulators eased restrictions on mortgages for large banks, trying to soften the blow from the Evergrande fallout. This is very much in line with our view that the government will seek specific stimulus measures instead of broad bank lending policies. The move should help property developers somewhat, but we haven’t seen much price action yet. Of note, the PBOC addressed Evergrande publicly for the first time, saying that risks to the financial system stemming from the company are “controllable” and unlikely to spread. The bank added that authorities and local governments are addressing the matter based on “market-oriented and rule-of-law principles.” Separately, the PBOC delivered the expected RMB500 bln of liquidity through its medium-term lending facility, keeping the MLF rate at 2.95%.



Cryptocurrency markets were supported by news that the SEC is set to approve a bitcoin futures ETF as early as next week. There are several crypto ETFs already in the market but none in the U.S. The implications of this are likely to be somewhat different than the cash-based ones. In theory, this could be a costlier product to run because the futures curve is almost always in contango, so rolling the contracts should cost more. But for market structure, it could also mean an even steeper bitcoin futures curve, which in turn would tempt investors to buy spot and sell the futures to lock in the implied carry (i.e. the cash-and-carry trade). Bitcoin is 7% away from its record high and Ethereum 9% away.

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