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Market Briefing: Shellshocked Currency Markets Attempt a Recovery

Investors and foreign exchange traders are trying to recover after getting resoundingly wrong-footed by yesterday’s US consumer price report. The dollar is slipping against many of its major rivals and equity futures are pointing to a slightly stronger open as positioning errors are unwound and liquidity levels return to normal.

Markets plummeted yesterday after the Bureau of Labor Statistics said price increases were faster and more persistent than anticipated in August, crushing the “peak inflation” narrative, and spurring a violent jump in short-term interest rates. The dollar surged higher, clobbering global equity bourses and rival currencies alike as terminal rate expectations soared and the probability of a 100 basis point at next week’s Fed meeting jumped. Yield curves remain deeply inverted as market participants assign higher odds to a policy-induced hard landing in the US and global economies.

Japanese Finance Minister Shunichi Suzuki jawboned the yen higher last night, warning that intervention “Isn’t something you give a warning about. And you don’t normally say whether or not you’ve done it. When you do it, however, you do it instantly, as quick as a flash”. The currency plunged yesterday on a widening in interest differentials, but recovered ground as several commercial banks told the Nikkei that the Bank of Japan had called them to obtain currency quotes – a step traditionally used to bring balance to markets by signalling incoming buying activity.

We’re always hesitant to draw “lines in the sand” in currency markets — they almost always blow away with the passage of time — but it does look as if Japanese officials are trying to defend the 145 level against the dollar, and traders are likely to grow nervous when approaching that threshold in the days to come.

The pound is dropping from session highs after inflation unexpectedly eased in August. Data from the Office of National Statistics showed prices rising at a 9.9 percent annualized pace last month, down from 10.1 percent in July as gasoline costs tumbled. The core consumer price measure, which in the UK strips out alcohol, fuel, and tobacco categories, accelerated slightly, rising 6.3 percent year-over-year in August, up from 6.2 percent the month before.

Markets still think the Bank of England will deliver a 50 basis point hike at next week’s meeting, but new Prime Minister Liz Truss’ plan to cap household energy prices has driven longer-term inflation and rate expectations dramatically lower.

The Canadian dollar is struggling to recover from its losses as the rates landscape turns more forbidding and oil prices remain sluggish. The country’s deeply-leveraged private sector is vulnerable to a rise in global interest rates, and the demand outlook for crude keeps worsening. The International Energy Agency yesterday cut its projections for Chinese consumption by 400,000 barrels a day this year and the American Petroleum Institute is expected to show a 6-million-barrel weekly build in US inventories later this morning. The West Texas Intermediate benchmark is holding near $87 and Brent is going for $93.

The Trudeau government has declared Monday a federal holiday for the funeral of the country’s titular head of state Queen Elizabeth II. Government employees will take the day off, but with schools, businesses, and financial markets staying open in the biggest provinces, any economic implications will likely be muted.

US producer prices — arguably a less theoretical measure of inflation — are seen falling -0.1 percent in August after a -0.5 percent decline in July. Businesses have seen an improvement in logistics and shipping costs, but pricing power has suffered as real incomes have turned deeply negative.

Tomorrow’s data is expected to show a flat month-over-month rise in retail receipts for August, but “control group” sales should show signs of robust growth. Although services categories are beginning to account for a greater share of household expenditures, tumbling gas prices likely freed up consumer spending in other tangible goods categories.

Karl Schamotta, Chief Market Strategist

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