Oil currencies outperform, buoyed by rising energy prices

Last week provided strong validation for our view that inflationary pressures will be here for longer than G10 central banks expect.

Oil prices, and the energy complex in general, rose strongly for the week, as did sovereign bond yields worldwide, driven higher by rising inflation expectations. For now, risk assets are weathering the storm, and most equity indices eked out a win for the week. Notably, the dollar failed to benefit from the severe back up in US treasury yields, which are starting to get close to the summer highs. The fact that inflation expectations, not real yields, are driving the rise in yields may explain the dollar's underperformance this week.

This week the focus will be on the key September inflation report out of the US, published Wednesday, followed the same day by the release of the minutes from the Fed September meeting. The latter will contain interesting, albeit somewhat dated, insights into the mindset of the Federal Reserve’s plans for accommodation removal.


Signs that the gasoline shortages have peaked in the UK and increasing Bank of England hawkishness boosted the pound, which was one of the better performing European currencies last week.

Our view that a rate hike in the UK could happen before year end was supported by weekend remarks from two MPC members, including Governor Andrew Bailey, which sounded worried about the prospects of "very damaging" inflation. Fellow MPC member Michael Saunders also warned households to get ready for a "significantly earlier" interest rate hike. It is clear that a hike may be coming as early as the November meeting, which should lead markets to seriously reprice their interest rate expectations, and that should provide a definite boost to sterling.


The key question in the Eurozone will be whether the impulse from the reopening and spending of the European funds will be enough to offset the weakness caused in the manufacturing sector by the worsening supply chain issues. We remain optimistic, but must admit that the balance of risks has shifted somewhat to the downside given the disproportionate impact of soaring energy prices on the European economy.

This week, August industrial production numbers are published, but we think the report is too lagged to have significant market impact, and the euro will follow developments elsewhere.


The headline of the September labour market report in the US was disappointing for the second straight month, but the details were somewhat more encouraging, notably the drop in unemployment and acceleration in wage growth. All in all, the job market recovery continues, albeit at a slower pace than the Fed would hope for, and probably not fast enough to expand supply fast enough to bring inflation down any time soon.

We should get confirmation for this from this week's inflation data report. Markets are expecting yet another month with headline inflation above 5% and core inflation above 4%.

The impact of another upward surprise in this data point is anybody's guess, but lately the dollar has tended to underperform whenever market expectations of inflation increases.


The Australian dollar ended last week higher against the US dollar, trading above the $0.73 mark and continuing to be one of the best-performing major currencies.

The main event of the week was the Reserve Bank of Australia’s October meeting, which was held last Tuesday.

As was widely expected, the RBA kept interest rates unchanged at a record low 0.1%, as they continue to cut government bond purchases to AUD 4 billion per week until at least mid-February. This decision reaffirmed the commitment of the central bank to maintain a supportive monetary policy and to not increase interest rates until inflation is within their target, which they don’t expect to happen before 2024. In its semi-annual Financial

Stability Review, the RBA said that a rebound in Australia's economy is expected for the last quarter of the year as lockdowns finish due to rising vaccination rates.

This Thursday’s employment data for September will be published, with the unemployment rate and employment change being the most important numbers for the market.


The Canadian dollar was the best performing currency in the G10 last week, supported by rising oil prices and better-than-expected domestic data.

Data published on Friday showed that Canadian employment has returned to pre-pandemic levels as the Canadian economy added 157,000 jobs in September. This was significantly more than market expectations (+65,000), and constituted the fourth consecutive month of positive job creation. Also, as expected, the unemployment rate fell to 6.9% last month from 7.1% in August, which also marked the fourth straight month of declines in the jobless rate. The return of employment to pre-pandemic levels bodes well for a continuation of the country’s strong economic recovery.

This week will be mostly quiet in terms of economic data releases, so CAD may be driven by events elsewhere.


The Chinese yuan ended last week little changed against the US dollar. The national holiday meant the mainland market was closed throughout most of the week, which might have contributed to low volatility in the yuan.

Mid-week, the currency was boosted by news that China and the US agreed in principle to hold a virtual meeting of President Xi Jinping and his American counterpart before year-end. This was seen as a chance to improve the relationship between the two countries and potentially deescalate some risks that seem to have increased of late, particularly with regards to the situation of Taiwan.

Issues within the Chinese real estate sector no longer appear limited to just Evergrande, as another Chinese developer, Fantasia, missed bond and loan payments. The cost of insuring China’s debt has increased, as five-year credit default swaps jumped to 60 basis points. The country’s currency, however, continues to prove resilient against negative news. On a more positive note, the Caixin services PMI was quite strong, jumping to 53.4 in September from 46.7 in August. Coupled with the Caixin manufacturing index and official PMI numbers

released in the week prior, it seems China’s economy is rebounding reasonably well, although energy supply issues remain a downside risk.

This week we’ll focus on September inflation data from China, out on Thursday, in addition to news regarding the RE developers and the energy situation.

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