Rebound In The USD Index? Commodities Also Climb On Chinese CPI

USD/JPY gaps higher as market fears ease over North Korea and the downgrade in Hurricane Irma. Lloyds believe the USD now sits at key support and are carefully eyeing the chances of a more pronounced rebound in the USD index which rose 0.7% on Monday. Commodities also rebounded as Chinese CPI came in at 1.8% above forecasts

Fears ease over North Korea, Chinese CPI surprises to the upside

Evidence of just how concerned investors were about the weekend was seen on Monday as a few of the major tail risks failed to emerge. In North Korea, fears were high that Pyongyang might conduct another nuclear test to celebrate the anniversary of their nation’s founding. This never happened and so some of the haven positions, particularly in the JPY appear to have been unwound. Seen as a prime showcase opportunity for its weapons program, NK obviously had other plans and so many people around the world breathed a collective sigh of relief.

The other major risk event was Hurricane Irma making landfall in Florida. With all the projections anticipating a storm with the power to do as much damage as Katrina, it was some additional welcome news as it was downgraded to a category 2 storm and now is just a tropical storm as it heads into South Carolina and Georgia. Although the storm will likely still have done some significant damage, it would appear at initial estimates that the death toll is going to be lighter and damage to livelihood less than was feared by many officials.

These were the main risk-on factors, but there was more good news as the inflation data out of China surprised to the upside. Coming in at 1.8% YoY, if true, this was unquestionably a great reading for China and global markets as a whole, as it demonstrates the Chinese economy continuing to stabilise. Commodities received a boost too, as the robust CPI is evidence that consumption should still be strong in the world’s second largest economy and biggest consumer of iron ore among other key metals and fuels.

The result of these factors was a gap in USD/JPY and a ton of further upside, as the pair moved up 1.5%, to the mid 109s. The Dollar Index was up an impressive 0.7%. Although EUR/USD fell, the USD was down against the CAD and the AUD as the commodity rally boosted the two commodity-currencies. Lloyds released their summary of the risk on move, aligning it mainly with North Korea, they now see the USD at key support,

“The market opens the week with a slight risk-on bias, probably due to North Korea not launching another missile. As such, equities are a little firmer, as is the USD alongside US treasury yields. While the USD accelerated lower harder than we expected last week, we remain within key USD support regions and continue to have significant warning signs that a broader rebound can develop in the short-term. We are therefore watching key near-term resistance levels”

Could the spike in US gasoline prices be felt strongly in this month’s CPI?

As US inflation continues to persistently underperform the Fed’s targets there have been signs this week that the CPI could come in a bit above expectations. The havoc wreaked by Hurricane Harvey had a major effect on Gasoline prices which spiked hugely as refineries were put offline in the flooding in Houston. Economists at ING released their view on the upcoming CPI reading this Friday, making a bold claim that the Fed’s less preferred inflationary reading will be at target sooner rather than later,

“Given the proximity to the 20 September FOMC meeting, the data highlight this week will be US inflation numbers.. Core inflation is likely to move a little lower in the near term, but we also think this index will soon be at 2%. With the PCE deflators likely to rise for the same reason, we still see potential for higher interest rates at the December FOMC meeting”

As the UK CPI report is also upcoming, it will curious to see whether the price pressure is going to pile on the Central Banks this month. The GBP could well enjoy another policy maker voting for a hike, but the need for a weaker currency in the face of Brexit is an important trade-off for the BoE. While many investors still believe the Pound is undervalued, Governor Carney and his officials seem anxious to stress how dramatic the Brexit transition could be, and a new (lower) normal is to be expected even if they are going to raise rates at some point over the next few years.

It is the US where rate hopes have dropped off the most sharply and an extraordinary reading this Friday might at least show doves that the US economy is still capable of producing some inflation, albeit it might take a hurricane knocking out most of the crude refineries to do it.

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