FX Update: Week of September 12 - Central banks prioritize inflation over growth. Dovish pivot priced out.

Market Bias: Hawkish

• The US continues to have the highest yields across developed economies. Market expectations are for a 75 bps rate hike at the next meeting, with a terminal Fed Funds rate of 4%.
• Two-year US treasury yields, generally highly correlated to fed activity, reached their highest level of 3.57% since 2007.

Risk to Market Bias: Fed might turn less hawkish if upcoming data show signals of an economic slowdown, deteriorating employment picture or weaker inflation.

Market Bias: Bearish

• Liz Truss, the new Prime Minister, plans to intervene in the energy markets by freezing energy bills at £2,500 annually until 2024. The scheme is estimated to cost approximately 6% of GDP, which would put further strain on the country’s debt-to-GDP ratio, already well above 100%.
• In the Recruitment & Employment Confederation (REC) job report, job vacancies and salaries fell in August, which are considered cooling signals for the labor market.

Risk to Market Bias: Markets expect a 0.75% hike at the next Bank of England meeting, narrowing the interest rate gap with the US. The terminal rate for policy rates is above 4%.

Market Bias: Bearish

• Despite a projected 0.75% hike, policy rates in Europe are still lagging on interest rates.
• With winter approaching, the weaponizing of gas supplies by Russia is putting a tremendous strain on European economies and fueling inflation which has not yet peaked.

Risk to Market Bias: A ceasefire between Russia and Ukraine would bring down energy prices and provide much needed relief to Europe.

Market Bias: Bearish

• The Canadian dollar has been generally stable versus the USD in 2022, as the Bank of Canada has kept up with the Fed on rate hikes. This may change as oil prices correct.
• The disappointing Canadian jobs report last week raised concerns about the macro landscape, tempering rate hike expectations (now 50 bps, previous 75 bps)

Risk to Market Bias: Continued volatility and uncertainty in oil and commodity markets may translate to a bid in the CAD.

JPY          

Market Bias: Bearish

• The yen fell to a multi-decade low against the USD due to policy and interest rate divergence between the Federal Reserve and the Bank of Japan (BoJ).
• BoJ is committed to supporting growth but unlikely to intervene with a tightening policy.

Risk to Market Bias: Central bank intervention to support the JPY, whether verbal or actual, may be adopted.

Market bias: Bearish

• COVID controls, economic slowdown, and a strong USD trend weigh on the CNY, worsening the domestic sentiment and speeding up capital flight out of China.
• The People's Bank of China (PBOC) said it would reduce the foreign currency reserve requirement ratio, which was originally adopted to support RMB, suggesting Chinese officials may want to engineer a lower RMB to support exports.

Risk to Market Bias: CNY has outperformed other Asian currencies recently and its safe haven status may extend beyond the region.

	Since 03.16.2020 (COVID lows)	2022 year-to-date	Since 02.25.2022 (Russia-Ukraine)
Broad-based commodity index	90%	20%	5%
Crude oil	173%	15%	-5%
Copper	49%	-20%	-20%
Wheat	71%	11%	1%
Corn	97%	17%	6%
Lumber	54%	-55%	-61%

Source: Bloomberg data through 09.09.2022. BCOM is the broad-based commodity index, generic first futures prices for all other.

Rising commodity prices are central to the global inflation problem in 2022. Commodity prices are higher across the board since March 16, 2020. A broad-based commodity index has nearly doubled since that date, with oil prices’ 173% increase through September 09, 2022 leading the way.

Yet year-to-date performance shows clear signs of a reversal, especially since the start of the Russia-Ukraine war. Lumber, a commodity-market darling post-COVID, has fallen by more than half this year.