FX Update: Big reaction in Aussie rates to CPI fails to impress AUD.

FX Trading focus: Aussie rates jolt on CPI, UK fall budget statement and Bank of Canada dead ahead

The Aussie traded a bit firmer overnight after the release of the Q3 Australia CPI data. The headline numbers were +0.8% QoQ and +3.0% YoY versus +0.8%/3.1% expected, respectively, but the “Trimmed Mean” received more attention as it came in at +0.7% QoQ and +2.1% YoY vs. +0.5%/+1.8% expected. Interestingly, while rates reacted violently to this development – sending terminal 2022 expected rates more than 25 basis points higher, the Aussie reaction was muted – sticking a bit higher versus the weakest G10, but sharply lower this morning again from overnight highs versus the US dollar and especially the Japanese yen.

It is a very loud grinding of the gears for an analyst to see a move like that overnight and to see AUDJPY tumbling sharply this morning after such an adjustment to the RBA expectations curve. Metals prices dropping of late and extending lower still overnight, not to mention a partial collapse in Chinese thermal coal prices after a recent major spike, may be contributing factors, just as declining long yields this morning are putting some overdue pep in the yen’s step as the last sell-off over-reached relative to developments in global fixed income. As well, we have end of month coming up on Friday after a historically bad month for the JPY and a Bank of Japan meeting tonight, so some of this is likely simply an adjustment of near-term stretched positioning and a dose of rebalancing. Nonetheless, it is a remarkable development and we’ll have to see how the price action picks up on the first of the month on Monday to see in hindsight whether this is a one off consolidation. For now, the lid remains on AUDUSD as long as recent highs to the 0.7600 area hold as well.

UK Fall Budget Statement up today. I have covered this in my previous update, but the general outlines here are that Chancellor Sunak is looking to cut outlays wherever he can while announcing a flurry of measures that nonetheless don’t add up to much. The fiscal deceleration could weigh on sterling from here, and expectations of a Bank of England rate hike at next Thursday’s Bank of England meeting have pulled back a tad further – now just barely above 50/50 odds of a move. Watching 1.3650-1.3600 as the key pivot zone that divides a simple “further consolidation” scenario from the risk of a new rout back to the lows of the cycle. GBPJPY, given the above, may prove higher beta this week to sterling direction, given the comments above.

Chart: AUDJPY
Despite the Q3 Australian CPI overnight triggering a major repricing of even 2022 rate expectations from the RBA (25 bps higher by end of next year relative to before the release), the Australian dollar was unable to hold its rally overnight and was especially weak this morning against a resurgent Japanese yen, which has likely risen on the factors mentioned above. Plenty more room for a sharp consolidation into month-end if safe haven yields push lower still, but given the scale of the recent JPY sell-off, it would take some doing to reverse this recent rally, perhaps a move all the way back below the 200-day moving average, currently near 82.65.