FX November 11, 2021 / 10:17 am UTC

FX Daily Strategy - North America, November 11th

By Adrian Schmidt

AUD slips on employment miss yet potential to the upside if rising yield environment persists

GBP blips a little lower on weak GDP, but concerns about a possible UK/EU trade war fading for now

JPY weakness to continue while yields rise and equities hold steady…

…but the combination of CHF strength and JPY weakness seems unlikely to last

Thursday kicks off with the huge miss in Australian employment report, with employment changes came in at -46.3k vs +50k expected, unemployment rate: 5.2%  vs expected 4.8%, participation rate: 64.7% vs expected 64.9%, coming with the background of a softer AUD in the last couple of weeks since the RBA meeting. In practice, the AUD market has not tended to be too concerned with local data, and much more focused on the general risk tone in the market, and we would expect that will be the case after the employment numbers. The aftermath of the strong US CPI data was reasonably positive for the AUD, as equities were only modestly lower while yields generally rose, implying a lower equity risk premium which is typically favourable for the AUD, particularly on the crosses. The AUD did initially rise against the JPY and EUR, while just about holding its own against the USD, but has fallen back after the employment numbers. However, the tendency in recent weeks has been for the AUD to rise against the USD when (global) yields are rising, and fall when (global) yields are falling, with AUD yields being a leveraged version of US yields. So it seems likely that Australian yields will eventually follow global yields higher, suggesting upside risks for AUD/USD.

EUR/GBP blipped a little higher on the weaker than expected UK GDP release this morning, although the 1.3% q/q number was only modestly below the 1.5% expectation. This probably won’t prevent the BoE raising rates in December, with the concerns centering more on the labour market than the precise GDP outcome, but at the margin it reduces the probability a little, especially since we suspect the two labour market data releases between now and the December 16 BoE meeting won’t provide real clarity. 

Yields spreads have moved slightly in GBP’s favour over the last couple of days, with UK yields being dragged a little more by the rise in US yields than Eurozone yields, and suggests the mid-0.85s will remain the territory for EUR/GBP for the moment. For now, the threat of a new trade war with the EU has receded a little, with UK Brexit minister Lord Frost backing away slightly from the threat of triggering Article 16 and suspending the Brexit deal for Northern Ireland, saying negotiations can still continue to explore options. This reduces the threat of a significant upside spike for EUR/GB in the near term, but remains a potential issue, so will tend to continue to limit the downside too. 

The main market move after the US CPI data was the rise in USD/JPY, although the decline in EUR/USD almost kept pace. US yields did rise significantly, but remain significantly below the levels of a few weeks ago. But with the equity market doing relatively little, higher yields were enough to push USD/JPY significantly higher. We are still uncomfortable with the steady rise in the real value of the USD that is resulting from higher US inflation, given the lack of much movement in longer term US yields, and a clear decline in real US yields, but for the moment the market is focused on nominal yields and the low equity risk premium, and that continues to weigh on the JPY. Nevertheless, we would expect it to be tough for USD/JPY to make gains above 114 without US yields rising back to recent highs above 1.6%. 

The case for JPY weakness is actually weaker than the case for USD gains elsewhere, as relatively low Japanese inflation argues for the JPY to adjust higher when inflation rises elsewhere. It was notable that Swiss National Bank Governing Board member Andrea Maechler said on Tuesday that Switzerland's low rate of inflation compared with other countries is contributing towards the high value of the Swiss franc, and that so long as inflation is so much higher abroad, compared with Switzerland with relatively low inflation, the expectation is that the franc can be slightly stronger. This logic should also work for the JPY, but at the moment is not. CHF/JPY ought to have potential to decline as the market’s approach to the currencies converges.


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