Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.
The DXY has drifted lower since the start of the week. We sit a little below 106.30 currently, which is slightly weaker than what 2yr yield differentials with the rest of the G3 imply, see the first chart below. To be sure though, the yield differential has only nudged up a touch over this period after last week's strong gains (+20bps). The market is clearly awaiting this week's key event risk in terms of tonight's US CPI print.
Fig 1: DXY Versus The 2yr Yield Differential
Source: MNI/Market News/Bloomberg
- Whilst this may leave the risks skewed to the upside for the USD, particularly if the CPI surprises on the upside, in recent months there hasn't been a great deal of follow through USD strength post inflation outcomes.
- The second chart below plots the DXY against US CPI release dates (the $ symbols on the chart). Green symbols represent upside surprises, while white symbols are as expected outcomes, red symbols are downside surprises relative to expectations.
- The last 3 CPI prints have been upside surprises for the CPI, but the DXY peaked shortly after each print. Part of this no doubt reflected profit taking to a degree, as the USD typically rallied ahead of these releases. The market may have also felt we were getting closer to peak inflation pressures in the US.
- The set-up is different this time around, with the USD broadly range bound to slightly lower in recent weeks and not rallying like has been the case in recent months. This is a caveat to keep in mind in terms of expecting a repeat outcome following tonight's US CPI release.
Fig 2: DXY Has Peaked Shortly After Recent US Inflation Beats
Source: MNI/Market News/Bloomberg
- There can still be other influences on the Fed hiking outlook, although we would note pricing for early 2023 Fed fund levels has caught up with the recent rebound in commodity prices, see the final chart below.
Fig 3: US Fed Expectations & Commodity Price Changes
Source: MNI/Market News/Bloomberg
Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.