FX Daily: Inflation becomes a tail risk


USD has the upper hand over negative yielding currencies amidst inflation risks
Philip Wee13 Oct 2021
    Photo credit: Unsplash Photo


    DXY closed at a new year’s high of 94.5 on inflation risks. St Louis Fed President James Bullard backed a decision to start tapering asset purchases in November and Fed hikes next spring or summer. Fed Vice Chair Richard Clarida believed the “substantial further progress” criteria for tapering asset purchases has exceeded its price stability mandate and almost met its employment mandate. Atlanta Fed President Raphael Bostic no longer considered high inflation as transitory. Last week, former US Treasury Secretary Lawrence Summers believed interest rates and the unemployment rate were below their natural rates and stoking inflation.

    In its World Economic Outlook released on Monday, the IMF called on central banks to be “very, very vigilant” on inflation and take early action to tighten monetary policy before price pressures become entrenched. The IMF projected inflation to rise sharply for the rest of 2021 before moderating in mid-2022 and falling back to pre-pandemic levels. Although the IMF downgraded 2021 global growth to 5.9% from 6.0%, it did not subscribe to stagflation risks. Even so, investors could not shake off this tail risk. Dow, S&P 500 and Nasdaq Composite fell 0.3%, 0.2% and 0.1% respectively in the overnight session with all indices below their 100-day moving averages. While the US 10-year treasury yield fell with equities to below 1.60%, bond yields will rise again if the Fed falls behind the curve on inflation.

    Not surprisingly, the weakest currencies in the DXY were the negative yielding JPY, EUR and CHF which depreciated 9.1% ytd, 5.6% and 4.9% respectively this year. According to Bloomberg, the total market value of negative yielding debt worldwide fell USD1 trillion last week, its largest drop since February when US bond yields were also rising. USD/JPY is likely to test its 115 resistance after it broke out of its 3Q21 range between 109 and 111. With CPI inflation in Japan negative since October 2020, the Bank of Japan has backed new Prime Minister Fumio Kishida’s pledge to end deflation through expansionary monetary and fiscal policies and economic growth. Likewise, EUR/USD is set to test 1.15 after it fell decisively below the year’s support at 1.17. Speculators turned net short EUR for the first week since March 2020, convinced that the European Central Bank lacked the Fed’s urgency to address what it considered to be transitory inflation. It did not help that the ZEW Eurozone expectations of economic growth fell for the fifth month to 21.0 in October from a peak of 84.0 in May. USD/CHF can revisit the year’s high of 0.9473 on 1 April; the support at 0.9250 has held up well so far this month. On 22 September, the Swiss National Bank confirmed that it intervened in 2Q21 to prevent the CHF from appreciating too much. This largely explained why USD/CHF tried and failed to break below the psychological 0.90 level in May-June.

    In Asia, the Bank of Korea signaled a rate hike at its next policy meeting on 24 November. BOK is also considering interventions to support the KRW which has depreciated 9.3% ytd to become Asia’s second weakest currency. Although the THB outperformed on Tuesday from Thailand’s plans to reopen its borders to some vaccinated tourists from 1 November, it did not change its status as the worst performer (-10.4% depreciation) this year. At its last policy meeting on 29 September, the Bank of Thailand raised its growth forecast and pushed back against rate cut expectations. Even so, the KRW and THB are still highly correlated (at 71.3% and 79.5% respectively) with the JPY, the worst G10 currency. Contrary to consensus, we do not see the Monetary Authority of Singapore keeping the status quo at its policy review tomorrow. We believe that the MAS will replace the zero-appreciation path of the SGD NEER policy band with a modest and gradual appreciation path. Having upgraded its 2021 growth and inflation forecasts, Singapore is a price-taker economy that is unlikely to ignore the inflation risks in the world. Neither do we expect USD/SGD to buck the trend of a rising USD worldwide.

     






    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]


    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.


    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.