Credit Agricole

Asian overnight

Sentiment was mixed in Asia. While investors were shocked by the highest US inflation reading in three decades, there was some support for sentiment coming from newswire reports that China’s policymakers may be looking to ease residential property curbs and that Chinese property developer, Evergrande, has made debt interest payments to once again avoid default. At the time of writing, Asian bourses trading in the green vs those in the red, were equally split and S&P500 futures were trading modestly higher. In G10 FX, the Antipodean currencies underperformed and the USD, GBP and NOK outperformed. The AUD was weighed down by weak labour market data.

The USD/JPY inflation hedge

Yesterday’s upside surprise in US inflation has given more voice to inflation hawks and gave the USD/JPY a lift. We think the exchange rate represents a good hedge against inflation. It has a strong and positive correlation with energy prices, which are one source of the move higher in global inflation. Higher energy prices are a terms of trade negative for Japan and a modest terms of trade positive for the US. Higher energy prices are also more likely to encourage the Fed towards raising rates than the BoJ. Indeed, the latter is increasingly treating higher energy prices as a negative shock to household incomes and a weight on growth. The Fed will also be one of the first major central banks to respond if inflation pressures turn out to be less transitory than expected. And, even if central banks, including the Fed, were to remain behind the inflation curve, the resulting steepening in the UST curve would push USD/JPY higher. Indeed, the strongest drivers of the exchange rate at the moment are the US-Japan short-term rates differential, the US-Japan box yield spread and energy prices. We maintain an end 2021 forecast for USD/JPY of 115.

CIBC

FX Flows

Disappointing Aussie Oct labour numbers. AUD$ goes offered, jobless rate jumped to 5.2% from 4.6%, employment change -46.3k, both full and part time jobs fell -40.4k and -5.9k respectively. However, participation up 64.7% from 64.5%. September’s employment change had small downward revision to -141.1k from -138k. Option related bids are noted in AUD$ from under 0.7320, think there will be more towards 0.7300. I do not see any noteworthy strikes nearby. Towards the late morning, AUD$ challenged the 0.7300, I believed the move was caused by Citibank headline.

AUDCAD printed 0.9126 low just now, keep an eye on this cross. Break of 0.9100 could lead to more losses.

$CAD ended 1.2500 in Toronto, it was trading at 1.2497 when someone decided to slap the bids. We thought it was a mishit when we were given at 1.2478 but looking at the price action, it was not a wrong hit. The bank hit bids from 1.2480 to 1.2472. Market came back to 1.2490s. That could have been for a stop loss trigger. Market stabilised, $CAD crept up to 1.2500. Citibank oil headline and the pair popped to 1.25115. There are a lot of option strikes due tomorrow, biggest is $1.4bn USD call strike at 1.2490.