Ebury: The rise in commodity prices will continue, as will the weakening of the USD

US inflation remains above 5% for the fifth month in a row, another strong reading confirmed. This sealed the fall in the dollar, which ended the week with a weakening against almost all major currencies. The negative correlation between US inflation and the dollar seems to have started to consolidate, estimate Ebury analysts Enrique Diaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia.

Ebury's comment:
The inflation reading did not significantly affect bond yields. Against the background of currencies against which the dollar depreciated, the notable exceptions were the Japanese yen, which was burdened with an increase in commodity prices and risk-sentiment, and the Turkish lira, which was losing again due to the actions of President Erdoan (who, among others, dismissed three decision-makers reluctant to rate cuts). interest rates).

This week will not be full of macroeconomic publications or central bank announcements. We are mainly awaiting Wednesday's inflation report in the UK in September, which may seal expectations for interest rate increases before the end of the year. Friday's PMI data describing business activity in major economies will show the situation in industry and services. The most important factor for us will be to what extent the economic recovery in the euro area weakens. As expected by the consensus, we should still observe strong expansion.

PLN:
Last week, the Polish zloty recovered some of its losses, which was supported by the external situation, including the weaker USD and improved sentiment towards risky assets, as well as high expectations of interest rate hikes in Poland. We started this week with another dynamic increase: based on the current market valuation, it can be concluded that the market is counting on a total interest rate increase of approx. 200 bp. by the end of next year. In such a situation, the NBP reference rate would be around 2.5%.

Market expectations are unsteady due to the lack of clear communication from the central bank. Their recent strong growth, however, puts the Monetary Policy Council in a difficult position: if it holds back with further increases, the zloty may experience a marked weakening.

This week we will have relatively many macroeconomic publications from Poland describing the situation at the end of the third quarter. However, signals from domestic decision makers and news from outside should be more important for the zloty.

EUR:
The euro last week lagged behind currencies and risky assets, most of which appreciated against the dollar. Currency is not favored by the fact that the European Central Bank lags behind most similar central banks in the context of limiting the degree of monetary support. The market does not expect interest rate increases in the near future. In this context, we are lowering our forecasts for the currency.

As for this week, expectations for the October PMIs seem moderate, so there is room for a positive surprise that would support the single currency.

USD:
Another reading of inflation above 5% and core inflation above 4% confirms our view that inflationary pressures will probably not be as short-lived as the Fed hoped in the summer. In this context, the announcement of the tapering during the November FOMC meeting seems almost certain.

Given the double-digit US fiscal deficit and real interest rates well below zero, we believe that the rise in the prices of risky assets, especially commodities, may take time. This is not necessarily a positive environment for the US currency. We still expect the US dollar to weaken against most currencies, especially emerging market commodity currencies.

GBP:
Good data from the UK labor market and industrial production brings us closer to the Bank of England's interest rate hike in 2021. It looks like it will decide on this move much earlier than the Federal Reserve. Over the weekend, BoE CEO Andrew Bailey warned that the bank "will have to act" to curb inflation, which supported market expectations for rate hikes. Contract valuations suggested this morning that the BoE may raise interest rates by 15bps, it is now fully priced in however, a "typical" move up by 25 bp. in November.

The inflation report this week is therefore crucial as it will be the last important reading that may influence the committee's decision. Both CPI inflation and the base measure are expected to be at least 3% - even before the raising of the energy price cap boosts inflation. In our opinion, this should be enough for a rate hike in 2021, which would significantly strengthen the pound.

CHF:
The Swiss Franc is still outperforming other safe haven currencies, although it currently feels quite expensive, especially against the euro, which is the main point of reference.

It seems that the lack of major changes in US yields helped the franc for most of the week. In recent days, he was also supported by the higher market valuation of the monetary policy normalization by the Swiss National Bank. The annual swap is at its highest since the end of 2018, and overall rates suggest that the market is expecting a tightening of SNB policy as early as next year. We believe this is an exaggerated valuation given the development of inflation in Switzerland and the current rhetoric of the central bank.

Like last week, the economic calendar for Switzerland is almost empty, so we will continue to focus mainly on news from the outside.

Source: Ebury and ISBnews