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Yen Sinks on Global Bond Rout, US Dollar Rally May Extend on CPI

Yen Sinks on Global Bond Rout, US Dollar Rally May Extend on CPI

Talking Points:

The JapaneseYen underperformed as Asian bond yields followed US Treasury rates higher following the Federal Reserve monetary policy announcement. The FOMC said it now expects to raise the benchmark lending rate three times next year, up from a pair of hikes projected in September.

Higher borrowing costs in the US may boost the cost of capital in general considering that the US Dollar is the undisputed global reserve currency. This narrative seems to be pushing up yields market-wide, spurring carry trade demand and weighing on the go-to funding currency.

The New Zealand Dollar likewise traded lower against a backdrop of narrowing yield spreads between the heretofore go-to carry venue in the G10 FX space and its counterparts. The Australian Dollar managed to hold up following an upbeat set of labor-market figures.

For its part, the greenback continued to climb having posted its largest daily gain in nearly six months in the aftermath of the FOMC meeting as markets outside the Western Hemisphere took their turn to price in the announcement. The upcoming release of November’s CPI data may extend the move further.

The benchmark year-on-year inflation rate is expected to rise to 1.7 percent, the highest in 25 months. An upside surprise in line with a recent outperformance of US economic news-flow may drive continued steepening of the projected tightening path.

The Bank of England policy decision headlines the docket in European hours. Governor Mark Carney and company are widely expected to remain in wait-and-see mode as they monitor the impact of the Brexit referendum on growth and inflation.

On balance, the announcement may mean relatively little for the British Pound unless minutes from the meeting or the voting pattern on the policy-setting MPC committee implies a sense of urgency in countervailing building price pressure. This seems rather unlikely however.

Join our BOE rate decision webinar to follow the announcement and its impact live!

Asia Session

21:30NZDBusinessNZ Mfg PMI (NOV)54.4-55.1
21:45NZDValue of All Buildings SA (QoQ) (3Q)1.4%2.1%5.3%
0:00AUDConsumer Inflation Expectation (DEC)3.4%-3.2%
0:30AUDEmployment Change (NOV)39.1k17.5k15.2k
0:30AUDUnemployment Rate (NOV)5.7%5.6%5.6%
0:30AUDFull Time Employment Change (NOV)39.3k-45.7k
0:30AUDPart Time Employment Change (NOV)-0.2k--30.5k
0:30AUDParticipation Rate (NOV)64.6%64.5%64.4%
0:30JPYNikkei Japan PMI Mfg (DEC P)51.9-51.3
0:30AUDRBA FX Transactions Government (NOV)-A$549m--A$450m
0:30AUDRBA FX Transactions Market (NOV)A$503m-A$439m
0:30AUDRBA FX Transactions Other (NOV)A$34m-A$26m
6:00JPYMachine Tool Orders (YoY) (NOV F)-5.6%--5.6%

European Session

8:00EURMarkit France Mfg PMI (DEC P)53.5 (A)51.7Low
8:00EURMarkit France Services PMI (DEC P)52.6 (A)51.6Low
8:00EURMarkit France Composite PMI (DEC P)52.8 (A)51.4Low
8:30EURMarkit/BME Germany Mfg PMI (DEC P)55.5 (A)54.3Medium
8:30EURMarkit Germany Services PMI (DEC P)53.8 (A)55.1Medium
8:30EURMarkit/BME Germany Composite PMI (DEC P)54.8 (A)55.0Medium
8:30CHFSNB 3m Libor Lower Target Range -1.25% (A)-1.25%High
8:30CHFSNB 3m Libor Upper Target Range -0.25% (A)-0.25%High
8:30CHFSNB Sight Deposit Interest Rate -0.75% (A)-0.75%High
9:00EURMarkit Eurozone Mfg PMI (DEC P)54.9 (A)53.7Medium
9:00EURMarkit Eurozone Services PMI (DEC P)53.1 (A)53.8Medium
9:00EURMarkit Eurozone Composite PMI (DEC P)53.9 (A)53.9Medium
9:30GBPRetail Sales Ex Auto Fuel (MoM) (NOV)0.5% (A)2.0%Medium
9:30GBPRetail Sales Ex Auto Fuel (YoY) (NOV)6.6% (A)7.6%Medium
9:30GBPRetail Sales Inc Auto Fuel (MoM) (NOV)0.2% (A)1.9%Medium
9:30GBPRetail Sales Inc Auto Fuel (YoY) (NOV)5.9% (A)7.4%Medium
10:30EURECB Publishes Allotment of TLTRO-II --Low
12:00GBPBank of England Bank Rate 0.25%0.25%High
12:00GBPBOE Asset Purchase Target (DEC)435b435bHigh
12:00GBPBOE Corporate Bond Target (DEC)10b10bHigh

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3

--- Written by Ilya Spivak, Currency Strategist for

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