Get 40% Off
🤯 This Tech Portfolio is up 29% YTD! Join Now to Get April’s Top PicksGet The Picks – Just 99 USD

Yen Creakout: Global Inflation Bad For Buck

Published 15/02/2018, 10:56
Updated 25/04/2018, 09:10

Figures showing hotter than anticipated US inflation in January produced, upon first glance, a surprising reaction in global markets. Higher US inflation, which by its nature should mean higher US interest rates led to a sell-off in the US dollar and a rally in stock markets. Less than a week earlier stock markets had collapsed and the dollar rallied over fears higher wages would produce higher inflation.

The most notable reaction was in the Japanese yen, which broke out of its long-term trading range to hit a 15-month high (15-month low for USDJPY).

Weekly candlestick chart for the Japanese yen

Japanese Yen

The US inflation data was accompanied by some particularly soft US retail sales figures. There is a sense now that higher consumer prices could kill off consumer spending and weigh on the US growth rebound. Slower growth would keep a lid on wage and overall price pressures. We do not see a notable ‘lift off’ in US growth, despite the tax cuts, so the Fed will probably will not deviate from the three hikes priced in by the market.

Global rate differentials explain a lot about why the dollar can’t find a bid, even when US inflation exceeds expectations. UK consumer prices growing faster than expected in January was a demonstration that inflation is picking up across the globe. We continue to believe the response to higher inflation and the removal of emergency stimulus from the other main global central banks means rate differentials with the US will converge rather than diverge. As the ECB, Bank of England and BOJ move closer to tightening policy, bund, gilt and JGB yields will rise faster than treasuries, making the euro, pound and yen more attractive than the dollar.

The current bout of dollar weakness could still stumble, particularly as EURUSD and GBPUSD approach multi-year peaks at 1.25 and 1.43 respectively. But the breakout in the yen skews the risks in favour of another leg lower in the buck.

Disclaimer: The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest and nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced. Losses can exceed deposits.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.