Winners and Losers
As we highlighted within our briefing yesterday, the US CPI numbers were likely to be the most important element of the trading day, if not week. The reading created volatility within the US Dollar but also throughout the market. Let’s take a look at the statistics first and then the market moves on the back of that publication. Core CPI, a price measure devoid of the volatile components of food and energy, rose 0.2% month-on-month, in line with expectations. Nominal year-on-year inflation also recorded in line with consensus expectations at 3.4%, down from 3.5%.
Interest rate expectations have been closely watched in the United States whilst investors grapple with understanding inflation as well as a new Fed Governor. Following the release yesterday, interest rate expectations were on the move lower once again. At the start of the month, an interest rate hike at the Fed’s September meeting was priced to the conviction level of around 70%. Falling 10% alone following the release of yesterday’s CPI data, that figure today stands at just 39%. Just one hike is now fully priced in ahead of year-end compared with nearly two prior to the last Fed decision.
As a result of the shift in short-dated rates, the Dollar initially sold-off. However, thanks to stickier rates at the longer end of the US yield curve, the Dollar managed to regain lost ground. Emerging market FX also benefitted from a decline in US front-end rates. The Mexican Peso extended its gain versus the Dollar, pushing higher despite already hitting two-year highs. USDMXN now trades at just 17.06. The Rand also pushed higher, benefitting from a firmer gold price and rising demand in ZAR-exposed carry trades.
Discussion and Analysis by Charles Porter
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