Currency Point: Supply chains put a spanner in the works

We continue to monitor EUR/USD and USD/JPY trades – the position of both remains interesting and as discuss in the past Currency Point EUR/USD looks oversold and is starting to shift away from the lower $1.15 level.

EUR/USD was quick to react to the US inflation data from last Wednesday. September CPI rose 0.4 per cent month on month and 5.4 per cent year on year both beat expectations by 10 basis points, but it’s the reasoning from the beat that is most notable. Supply chains continue to present a real issue for the global recovery.

You only need to look at the issues in oil and gas markets or semi-conductors to understand why prices are ballooning without any meaningful economic return. New car sales, food and energy were big gainers in September so when you strip out food and fuel CPI was more ‘measured’ at 0.2 per cent month on month and 4 per cent year on year. But it does appear that inflation is being driving by environmental factors rather than structural improvements in the economy.

This mismatch in the inflation read knocked the USD about lead by EUR/USD which moved from $1.1525 to $1.1595. We believe it will probably move higher still in the coming period before retesting the $1.15 as the fundamentals between Europe and the US come to a head in 2022.

USD/JPY however spiked to a new 3 year high of ¥113.80 however as bond yields in the US eased so did the pair but at ¥113.30 this long call continues to play well.

Interestingly enough the Minutes from last week FOMC meeting confirmed that our playbook is going to play out as expected. Although there were no additional pieces of information. It confirmed that policymakers believe that the substantial further progress standard had been met and that a gradual reduction of the pace of QE purchases may be warranted.

Specific for the playbook was the indication that if a decision on tapering were to be made at the next meeting it would likely begin in mid-November or mid-December. History suggests it will be earlier rather than later.