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Market Briefing: Currency market rebalancing continues as inflation fears ebb

Equity bourses are setting up for another day of gains and the dollar is continuing its retreat after data out yesterday morning showed US producer price increases slowing in October for a second month, adding to evidence of an easing in inflation pressures. Yields are essentially unchanged and risk appetite remains robust across the foreign exchange markets, with commodity-linked and high-beta currencies eking out small gains as the big European units recover from months of selling.

The euro has regained its poise after selling off when a rocket hit a village in Poland, raising the risk of an escalation in the Russia-Ukraine conflict. US President Joe Biden, relaying an assessment from intelligence officials, said that the weapon’s trajectory suggested it was likely fired by Ukrainian air defence crews trying to hit incoming Russian missiles. Japan’s yen is back near the 140 mark after briefly topping 137.70 against the dollar when investors scrambled for safety.

Inflation hit a 41-year high in the United Kingdom last month, accelerating to 11.1 percent as food and energy prices climbed. Numbers released by the Office for National Statistics this morning showed the year-over-year pace of price increases climbing from September’s 10.1 percent, complicating the policy picture ahead of today’s parliamentary testimony from Bank of England Governor Andrew Bailey. Investors had expected the Governor to join his colleagues in warning that markets have gotten ahead of themselves in pricing an extremely aggressive tightening cycle – but a more nuanced message may now be more appropriate.

The pound has moved steadily up toward the 1.20 mark against the dollar in recent weeks on improved fiscal confidence and a more stable interest rate outlook. Ceteris paribus, tomorrow’s Autumn Statement from Chancellor Hunt could serve as a catalyst for a decisive break to the topside.

The Canadian dollar is advancing ahead of an October inflation report that is expected to show an acceleration in prices. Markets are bracing for a 0.7 percent month-over-month rise in the headline consumer price index, with higher food and gas costs triggering a renewed acceleration. At first blush, a higher-than-expected number could narrow the interest differentials that currently favour the US dollar – but we would note that base effects and other methodological quirks have played havoc with inflation prints in both the US and Canada in recent months. A downside shock looks equally plausible.

Economists think US retail sales climbed by at least 1 percent last month, but the so-called “control group” – with cars, gas, building materials, and food services excluded – could look much weaker.

Import prices are seen falling -0.4 percent as supply chain issues are resolved and demand pressures abate. Industrial production is likely to post a small 0.1-percent gain as one-off factors bolster factory activity.

Later in the morning, we would highlight business inventory data as being worthy of your attention. Stockpiles are expected to rise 0.5 percent in September from the prior month, echoing a theme heard in virtually every earnings call held over the last few months – the inventory-to-sales ratio is falling across a wide cross-section of the American corporate sector as shipped orders begin to outpace demand growth. “Bullwhip” effects rooted in this dynamic are likely to play havoc with inflation prints in the months ahead, with some major retailers forced to unload products at steep discounts after the holiday season.

Sentiment in the real estate markets is likely to continue falling when the National Association of Home Builders releases its latest data. Investors expect the group’s index to fall to 36 from 38 a month earlier as higher borrowing costs slam sales and building activity.

Oh, and some retired guy in Florida called a press conference to say he was looking for a job again. Markets don’t care.

Karl Schamotta, Chief Market Strategist

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