USD has consolidated yesterday’s strong gains in quiet overnight markets and news flow has been very light. Last night’s November 2 FOMC meeting minutes were entirely consistent with a December rate hike (most officials said it would be appropriate “relatively soon”) but contained little guidance on the longer-term prospects for rates into 2017.
USD
After yesterday’s selloff, forwards now price 44bp of tightening (after a certain 25bp in December). According to our risk-aversion thermometer (RAT), markets are very close to risk neutral (overall index -0.9), as they have been in the entire period since the US election outcome. Relative to recent trends, low levels of equity vol are counterbalanced by relatively elevated FX vol in most pairs.
CAD
USD/CAD has held above our retracement pivot at 1.3439 after a move higher in US interest rates lent broad-based support to USD once again. Minor event risk will present itself today in the form of the November CFIB Business Barometer release (no consensus, prior 57.7). Support is located at 1.3459 and 1.3378, with resistance coming in at 1.3540 and 1.3575.
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JPY
Having looked as if it had run out of momentum around 111, USD/JPY is marching higher again, with higher US yields driving and the move reflecting USD/JPY’s high leverage to US rates within G10. With Fed hike expectations already quite richly priced, it is tempting to conclude that the upside for rates and for JPY/USD is limited, although it is hard to go against momentum this strong.
The JPY side of the rate spread is likely to get little support from tonight’s run of Japanese data. On the BoJ’s core measure (ex-fresh food), CPI inflation is expected to remain little changed in October (-0.4% y/y from -0.5%). The MoF’s weekly capital flows data have recently shown steady, but unspectacular, demand for foreign equities and bonds, although tonight’s data for the week to last Friday will be the first that are fully post-US election. It will be interesting to see whether overseas bond demand has risen with global yields and in light of the BoJ cap on domestic yields.
