Ebury: Safe havens outperformed – focus on inflation

By Enrique Diaz – Alvarez

Safe havens such as the Japanese yen and the Swiss franc outperformed last week as clear-cut statements by Fed President Powell reinforced uncertainty about the impact of the COVID Omicron variant and led to a slump. A mixed U.S. employment report released last week did little to stabilize stock and credit markets, although movements between major currencies were modest. The dollar performed mixed and there was no common denominator in emerging market currencies, which ranged from a 2% gain for the Mexican peso to another weekly collapse of more than 6% for the Turkish lira, which was plunged by increasingly volatile Erdogan’s policies.

In addition to the news on the infectivity of the Omicron mutation, traders will be watching closely for the US inflation report coming out on Tuesday. There, another increase in both the central and the core inflation index is expected, which is expected to reach a high of 30 years. Apart from that, there is not much first-rate data on the economy, so the markets will continue to stick to every word that comes out of Central Bank executives, and they will pay particular attention to the speech of Boradbent, a member of the Monetary Policy Committee of the Bank of England. on Monday.

Sterling

Sterling tends to suffer during periods of high risk in the financial markets, with last week being no exception. The comments from members of the Monetary Policy Committee who claim to take a cautious approach to the Omicron variant did not help much. We still believe that the decision on whether we will see an increase in interest rates in December will be perfectly balanced, and we are waiting for Broadbent’s speech on Monday as confirmation that he has a bolder (hawkish) view. Once confirmed, we believe there is a strong commitment to a pound rally, as the currency has been severely penalized over the past two weeks, particularly against the US dollar.

Euro

The common currency did extremely well in the space of two weeks with high risks on the one hand and “aggressive” voices on the other, on the part of the US Federal Reserve. The huge surge in November inflation in the Eurozone last week was a resounding signal of President Lagarde’s extreme timidity. In particular, 21.9% of producer price inflation alone can not guarantee that inflation levels will not fall soon, as these price pressures inflate through supply chains to the final consumer. Inflation in Germany, which has reached 6%, must be particularly noteworthy. We expect that, in the wake of this data, there will soon be some aggressive impetus against Lagarde’s infamous timid stance, and we remain of the view that European Central Bank interest rate hikes cannot wait until 2023.

Dollar

The “hawk” overthrow of Powell’s presidency this week is a remarkable development, although we have been waiting for it for a long time. It was a clear statement that the word “transitional” should be dropped when discussing the current inflation phase, and hinted that it was ready for a significant increase in the rate of decline in the bond market at its December meeting. The US Joint Labor Report for November is unlikely to have created a different perspective than the current one. While the number of new jobs was disappointing, unemployment figures in household employment surveys in the US showed an exponential decline, suggesting that the country’s economy is very close to full employment and that expanding supply will bring little relief from inflationary pressures. This week’s inflation report is expected to break records, go back many decades and consolidate the US Federal Reserve’s newfound determination to combat inflationary pressures by curbing currency.

* Enrique Diaz – Alvarez is Chief Risk Officer of the international payment company Ebury. The company’s analysts were named by Bloomberg in the first place of the most successful forecasts for the EUR / USD exchange rate in the fourth quarter of 2020.