USD recovery was short-lived ahead of next week FOMC meeting
The US dollar got a fresh boost yesterday after the release of better-than-expected inflation report. The headline CPI gained 1.9%y/y, against median forecast of 1.8%, up from 1.7% in July. The core gauge also beat expectations of 1.6% by rising 1.7%y/y. This upside surprise may have renewed expectations of an upcoming tightening move from the Fed. However, many clouds remain on the horizon.
First of all, real average weekly earnings grew only 0.9%y/y, down from 1.1% in the previous month, suggesting that the significant recovery of real wage growth that started at the beginning of the year may have come to an end, which is definitely not of good omen for the Fed normalization cycle.
Second, hurricanes Harvey and Irma have substantially blurred the Fed’s vision by distorting the economic data. Unfortunately, it will take months for the dust to settle down, which could prompt the Fed to act with caution. New York fed President Dudley mentioned this point as he argued that the hurricanes could affect temporarily the timing of the next rate hike.
The dollar recovery was short-lived as the greenback reversed gains against most of its peers. The single currency rose 0.13% to $1.1940. Commodity currencies were also better bid with the AUD, NZD and CAD rising 0.25%, 0.66% and 0.16%, respectively. We believe investors will remain cautious ahead of next Wednesday FOMC meeting as there is a growing sentiment that the Fed will play for time, once again.
Russia: Markets strongly expect a rate cut
The Central Bank of Russia will decide about its key rate today. There is a significant likelihood that the central bank lower its key rate to 8.5%. In July, the CBR decided to remain on hold, markets expectations for a rate cut are now strong.
There are a major reason for that, it has been a while that Russian inflation is on its way lower. Consumer prices have increased 1.7% year-to-date. Annualized figure is 3.3% below the central bank expectations. The central bank has now some room to act to normalize its monetary policy.
Currency-wise, the ruble is trading at the highest levels for the last two years against the dollar at 52 ruble for one single dollar note. It is important to remember that before 2013, the USDRUB was trading around 30. We consider that the CBR is willing to strengthen the currency by lowering its key rate. Today’s event should not appear as a non-event but as a remainder of benefiting from the likely strengthening of the Russian currency over the medium-term.
