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Australian dollar booms on weaker US inflation

au.investing.com/analysis/australian-dollar-booms-on-weaker-us-inflation-200535225
Australian dollar booms on weaker US inflation
By David Llewellyn-Smith   |  Nov 11, 2022 10:55
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DXY was smoked last night as US inflation printed softer than expected:

 

AUD was the mirror image, up nearly 3%!

AUD
AUD

Encouragingly, oil hardly budged. Gold is the winner!

BRENT
BRENT

Copper broke out but other metals are subdued:

COPPER
COPPER

Big miners (NYSE:RIO) popped but lagged the market:

RIO
RIO

EM stocks (NYSE:EEM) looked to the sky:

EEM
EEM

With corroboration from junk (NYSE:HYG):

HYG
HYG

As US yields sank and the curve steepened:

YIELDCURVE
YIELDCURVE

Stocks heaven!

SPX
SPX

TD Securities wraps my thoughts well:

US CPI (Oct): Is the Fever Breaking?

Consumer prices handily beat expectations again but to the downside in October, with headline CPI advancing a still strong 0.4% m/m. Similarly, the core index fell significantly below consensus expectations (TD: 0.4%, consensus: 0.5%), rising at a still above-trend 0.3% m/m pace, with slowing reflecting more modest, but still elevated rents and OER inflation, coupled with a nice retreat in core goods prices.

CPI
CPI

In our view, the October CPI report should cement expectations for a 50bp rate increase at the December FOMC meeting, in line with our forecast. At this stage, there is no longer a need to front-load tightening and the Fed now has room to shift to a steadier hiking pace going forward.

RATEHIKES
RATEHIKES

Rates: Treasury yields fell sharply and the curve steepened as the market priced in a less hawkish Fed. We think that the market may be getting a little ahead of itself as the Fed will need more reports to confirm that inflation is slowing before it can signal a pause. We remain long 10y Treasuries and in SFRH3-H5 flatteners.

FX: One print does not make a trend, but it sure does help. Given where we are in the tightening cycle, it is natural for the market to think about the end-point is near. That introduces an asymmetry in the USD around data/Fed. We have noted a USD correlation switch to easing priced into the curve. Positioning ahead of this meeting showed a notable reduction in USD longs across several pairs. This will likely extend in the yen. USDJPY has put in good work to form a top and downside pressure is likely persist as yen has been oversold on crosses. We like CADJPY downside.

USD
USD

The Fed’s nowcasting model is still printing above 0.4 per month:

INFLATION
INFLATION

Two very different scenarios present themselves. Either sticky inflation combined with this sudden easing in the FCI will keep the Fed on track for more (less steep) tightening and this is another, larger, bear market bounce for everything.

Or, US inflation will keep falling and a US soft landing becomes a distinct possibility meaning DXY has topped and AUD bottomed.

I am still leaning toward the former as the base case but today is the first time in a long while that I can see a not unreasonable path to the latter.

Australian dollar booms on weaker US inflation
 

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Australian dollar booms on weaker US inflation

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