US inflation miss causes dollar collapse

It was a night of dramatic currency moves as the Japanese yen strengthened below 100 to its strongest level since Brexit, while inflation data and Fed speakers added some other volatility throughout the session.

US trader
Source: Bloomberg

None of which were good for equities as the S&P 500 lost 0.6%, with the focus of the selling in the 'yield' sectors, such as utilities and telecoms, which did not react well to hawkish comments from the Federal Reserve’s William Dudley who said a September hike was on the table. The pound rallied after stronger than expected PPI data and WTI oil surged another 2% above the US$46 level.

The big story overnight was the collapse in the US dollar, which bottomed at 94.42 around 10.30 pm AEST just as US CPI was released missing market expectations. There were comments from the Fed’s John Williams, Dennis Lockhart and William Dudley, but it was Mr Dudley’s staunch hawkishness about the potential for a September rate hike that helped the DXY pare some of its losses.

DXY

US headline CPI grew at 0.8% year-on-year (YoY) below market expectations for 0.9%. But more concerning for the market was that Core CPI (Ex-Food and Energy) missed on monthly and yearly expectations, and only increased 0.1% month-on-month – the second-lowest monthly growth in over a year.

It was as this data dropped that we saw an immediate surge in US dollar currency crosses. The Aussie briefly spiked up to US$0.7749 before pulling back to below US$0.77. But the bigger concern for FX markets was the surge in the Japanese yen to its strongest level since Brexit. With pretty much all of the monetary bullets spent and the Japanese government’s recent fiscal package failing to excite the markets much, a steady move below 100 looks increasingly likely.

The other big inflation release was the much better than expect UK CPI and PPI releases. Particularly, Core PPI, which saw its strongest year-on-year growth since June 2012. The dramatic 13% decline in the pound looks to already be starting to have some upside effect on inflation as tradables prices rise. And the question in currency markets is whether the potential for a surge in inflation may temper the Bank of England’s well-signalled intentions to ease monetary policy further.

The pound surged 1.3% in the wake of the CPI and PPI releases, bouncing off the US$1.2880 level again.

Both the Aussie and Japanese markets are set for a negative open. Although Chinese markets are looking a little better. The main bright spots in the Asian session will be commodities-related stocks, which will be a major beneficiary of the weaker USD. WTI oil’s 2% surge overnight should help energy stocks. While copper gained 0.9% and iron ore 3%, which should help a number of materials stocks.

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