Currencies Tumble As Inflation Worries Grow

By Kathy Lien

Risk appetite soured today as the Dow Jones Industrial Average closed lower for the first time in nine trading days. The simultaneous decline in currencies and Treasury yields confirms our view that investors are growing concerned about high inflation. USD/JPY dropped to its lowest level in nearly a month. This is not because of the impact on U.S. rates but because of the impact on the economy. Producer prices rose 0.6% in the month of October, right in line with expectations. Although core PPI and the year-over-year rate growth was slightly weaker than anticipated, at 8.6%, wholesale prices grew at their fastest pace in more than a decade. Tomorrow’s consumer price index is generally more market-moving and today’s report gives investors very good reasons to believe that CPI will be hot.

The problem is that the pace of growth isn’t keeping up with the pace of inflation, and that’s what makes us worry. Yields are falling and stocks are falling because investors are concerned that consumer pocketbooks will be pinched by higher prices this holiday season. The supply-chain problem could prove to be even more troublesome as less inventory drives up prices. This means that consumers will have to dip into their savings or spend less. Thanksgiving is approaching quickly in the U.S. and, according to agriculture experts, the cost of turkeys is up as much as 25% due to shipping and labor constraints. Some markets are subsidizing the difference to get customers into their shops, but only if they spend more on other goods that have also increased in price.

Japanese Yen crosses were hit the hardest, with AUD/JPY and NZD/JPY leading the slide. That’s no surprise because AUD and NZD are particularly sensitive to risk appetite. Australian business confidence and New Zealand credit-card spending increased sharply in the month of October. Australian consumer confidence numbers are due for release this evening, and we continue to expect confidence to be bolstered by warmer weather and fewer restrictions. Inflation numbers are due from China as well and, like the U.S. prices, are expected to have increased sharply last month.

The euro ended the day unchanged despite dovish comments from European Central Bank officials. According to ECB member Klaas Knot, conditions for a rate hike are not unlikely to met in 2022. The latest economic reports from Germany were mixed. While the country’s trade surplus increased, exports declined and imports rose less than expected. The current conditions component of the German ZEW survey fell sharply, but the expectations component increased. The Eurozone index also ticked higher, a sign that investors are still optimistic about the recovery. The Canadian dollar shrugged off a sharp recovery in oil to end the day unchanged against the greenback.