Market focused on US CPI – we see mild upside risks
Underlying USD tone has been negative, but main supports have held against most currencies
Modestly stronger than expected CPI to keep USD in established ranges
NOK still needs better risk appetite to make gains
GBP weakness may be sign of things to come with UK yields likely to decline
Thursday sees US October CPI, the main data of the week and the numbers that the market has been waiting for. In the run up to the data we have seen general USD weakness followed by a USD recovery on Wednesday, with EUR/USD shying away from resistance at 1.01, USD/JPY finding support above 145, and AUD/USD holding below 0.6550. However, the CAD and the scandis did break important support levels to hit their highest against the USD since September. The CPI data loos likely to determine the direction of the next move. If it is weak, we can expect lower US yields, higher equities, and a break of key levels. If it is as expected or stronger than expected, we are likely to see the USD hold the range or make a recovery. Even so, we see the risks as being biased to the USD downside. As expected data probably won’t trigger much of a rally, and the turn in sentiment in the last week suggests a moderate bounce could attract USD sellers.
In terms of our forecasts, we see mild upside risks relative to the market consensus of a 0.6% headline and a 0.5% core m/m rise. We expect a stronger 0.7% increase overall and a third straight 0.6% increase ex food and energy. Like the previous two months, we expect the core rate will be on the low side of 0.6% before rounding, so strength will be moderate, but should be enough to trigger at least some initial USD gains, with EUR/USD likely to drop back below parity and USD/JPY head back up to the middle of the 145-150 range.
Before the US numbers there is Norwegian CPI data, which is expected to show a rise in the y/y rate to 7.1% in October, with the core rising to 5.5%, both the highest in this cycle. The NOK was one of the better performers in October but has fallen back in the last couple of days, perhaps in belated reaction to the dip in equities seen after the FOMC. EUR/NOK continues to be highly correlated with movements in equities, and remains slightly low on the basis of the recent correlation. Even so, we continue to see the NOK as one of the fundamentally most attractive currencies given the huge current account surplus generated by the high gas price and a relatively attractive level based on the historic relationship with yield spreads. Of course, it continues to be held back by the policy of moving most of the oil revenues into the government pension fund where it is held in foreign currency, so the direct flow impact of the current account surplus is very muted. But the big terms of trade move in Norway’s favour still makes the NOK look attractive from a valuation perspective, and any recovery in risk appetite is likely to mean the NOK is one of the better performers.
Otherwise there isn’t much on the data calendar except for the usual Thursday US claims data, but there are scheduled speeches from several central bankers. Two UK MPC members, Ramsden and the arch-dove Tenreyro, along with Maechler from the SNB, Enria from the ECB, Mester, George and Williams from the Fed and Macklem from the BoC. Of these the UK MPC members may have the most scope for market impact, as GBP was the biggest mover on Wednesday and seems to be in play ahead of the November 17 Budget. EUR/GBP rise a big figure on the day despite there being no news of note and no big moves in yields. This suggests sentiment remains negative, as with all the major currencies approaching big resistance levels against the USD on Wednesday morning, GBP was the one that rejected those levels most clearly. We still expect to see UK yields fall substantially to belatedly justify GBP weakness, and such declines could be spurred by dovish comments from MPC dove Tenreyro who voted against the consensus in only calling for a 25bp hike at last week’s meeting.