US Open Note – Inflation risks and the rate conundrum, dollar hangs in there

Risk evaporates but US Industrial production disappoints

Market sentiment softened and the dollar remained subdued on the first trading day of week. Expectations that the Fed is preparing to taper is keeping the reserve currency afloat as well as pushing up the 10-year yield close to 1.62%. Inflation risks seem to be pushing central banks to take action, as markets are pricing in interest rate hikes in the later parts of 2022.

US industrial production in September was much weaker, coming in at -1.3% against a forecast of 0.3%, while the Capacity Utilization rate also ticked lower to 75.2%, down from 76.4%. It appears rising energy costs have left their mark on industry.

The dollar index is consolidating around the 94.00 handle while the euro is struggling just beneath the $1.1600 barrier. The yen is static at 114.30 per dollar.

Governor Bailey signalled that the BOE is gearing up to raise interest rates to tackle growing inflation risks. Although inflation was viewed as transitory, elevated energy prices are boosting inflation and prolonging its effects. He reiterated that the BOE will need to act if risks to medium-term inflation and expectations change. Inflation forecasts that are more than double the BOE’s target rate of 2% are on the table, especially as the energy crisis persists and supply shortages endure. Moreover, inflation is also viewed in the record high house prices, which were reflected in Britain’s HPI index of 1.8% for October, jumping from the previous month’s increase of 0.3%. Surprisingly, the pound appears paralyzed around the $1.3730, not capitalising on the news.

Inflation worries and commodity currencies

New Zealand’s Q3 headline inflation figures shot to 2.2%, beating expectations of 1.5%; however the kiwi dropped to 0.7050. With an environment close to full employment, growing house prices and supply chain issues persisting, the cost of living has rocketed and rumours have it that the Reserve Bank of New Zealand will have to reassess its stance towards interest rate hikes. So the growing uncertainty may be hurting the currency.

China’s growth lagged in the Q3 as the country dealt with setbacks from the property sector and an energy crisis. The gross domestic product, which is a gauge of the health of the economy, expanded by 4.9% from last year, missing the forecast and was down from the previous quarter of 7.9%. The country’s unemployment rate improved, dropping to 4.9%, from 5.1%, while September retail sales came in strong at 4.4%. If these risks drag out, the effects could start to weigh on commodity-heavy currencies. The aussie has retreated to 0.7386 and Australia’s Monetary Policy meeting minutes are due at 00:30 GMT. So we may see slight volatility in the aussie just after midnight.

WTI oil futures remain buoyant around $83.20 per barrel after seven weeks of gains due to the energy crisis around coal and natural gas prices, while gold is holding around the $1,764/oz mark. The black liquid is soaring as an energy crisis produces painfully rising costs across the globe. The loonie edged marginally lower on a slight miss in new housing projects that came in at 251K, as opposed to the expectations of 265K. The USD/CAD pair is currently at C$1.2380.

BOE Monetary Policy Committee (MPC) Member Cunliffe is speaking at 14:30 GMT, while the Bank of Canada’s business outlook report is also planned at that time, which could shed some light on the robustness of the Canadian economy, whose currency is heavily affected by oil.

ECB Governing Council Member Lane is speaking at 15:40 GMT and investors may be listening out for clues around future monetary policy.

At 00:30 GMT, Australia’s monetary policy meeting minutes will be released.

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