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Whether Fed goes into active monetary policy mode again is dependent on inflation pressures. The USD has lost ground on this morning’s US CPI release.
The annual inflation rate in the United States edged up to 2.5 pct in April of 2018 from 2.4 pct in March, matching market expectations. It is the highest rate since February of 2017. Core inflation was flat at 2.1 pct. On a monthly basis, consumer prices went up 0.2 pct, higher than 0.1 pct in March but below forecasts of 0.3 pct
Indeed, the real Fed interest rate (Fed funds rate minus inflation) has not risen at all. It is still at the level seen in early 2016 – when inflation was much lower.
Elsewhere, China’s CPI inflation surprised the market to the downside, at 1.8% y/y in April, down from 2.1% previously. Inflation momentum has clearly illustrated a sluggish trend in recent months, which in turn indicates a cyclical economic slowdown.
In the meantime, PPI inflation also registered a negative monthly change for the third consecutive month, in line with CPI inflation dynamics.
The soft inflation reading suggests that there is room for monetary policy easing over the next few quarters, which will result in a narrowing rate spread between CNY and USD.
In other words, the carry gain of CNY long positions will diminish.
Furthermore, capital outflow pressure could re-emerge as Chinese corporates may have to repay their USD loans as the funding cost of the greenback has been rising.
While U.S. rates round-tripped this week, with 10s, for example, breaking through 3% only to close Friday nearly unchanged since last week.
Currency Strength Index: FxWirePro's hourly USD spot index is turned back to -64 levels again which is bearish indication after US prints inflation rate that is highest in 14 months while articulating at (12:50 GMT). For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex
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