Yen Takes Lead With Caution Evident Ahead Of U.S. CPI

Safe-haven currencies were in demand, albeit the U.S. dollar faltered against most of its G10 peers save for the Antipodeans, as participants awaited the release of U.S. CPI data later today.

• U.S. Tsy yields faltered across the curve, applying pressure to the greenback, after a NY Fed survey released Monday indicated a sharp drop in consumer inflation expectations. The BBDXY index traded on a heavier footing, but struggled to challenge yesterday's lows.
• Softer U.S. Tsy yields amplified demand for the yen, which remains sensitive to moves in interest rate differentials. The spread between U.S./Japan 10-Year yields shrank ~2.0bp in the Tokyo session, while 2-year gap narrowed ~3.7bp.
• A degree of caution was evident across G10 FX space as the JPY outperformed in the Asia-Pac bloc, while the CHF paced gains in the European sub-basket, with unwillingness to take on more risk ahead of the U.S. CPI print likely in play.
• The yen may have drawn some incremental support from comments from ex-BoJ member Kataoka, who was known as a staunch dove. The former policymaker said that the BoJ could be able to start policy normalisation in mid-2023, albeit he conceded that it would be a "miracle" and his comments did the rounds after being originally made last Friday.
• The yen still sits atop the G10 pile at typing. Although spot USD/JPY held yesterday's range, option skews indicated growing bearish sentiment among option traders. One-month skews fell to its lowest point since Aug 4 as the short-end led declines.
• The Antipodeans sold off while holding narrow ranges, despite a fairly resilient backdrop for the Australian economy painted by a slew of local data signals. Weakness in the space coincided with an uptick in USD/CNH.
• The CNH weakened amid domestic COVID headwinds and concerns around holiday spending momentum, even as the PBOC delivered the fourteenth consecutive stronger than expected yuan fixing. A notable decrease in the error term (actual fixing less average sell-side estimate) may have added pressure to the yuan.
• While U.S. inflation figures are set to steal the limelight, German ZEW survey & final CPI reading, as well as UK jobs market data will also cross the wires.