Thursday surprises - BBH

"There were several surprises today. They began in Asia Pacific with strong Australian jobs data and disappointing Chinese data.  But Australian employment data is volatile, and many had already come to appreciate that the Chinese economy lost some momentum.  The surprisingly hawkish guidance from the Bank of England and firmer than expected US CPI may have farther reaching implications than the Australian and Chinese developments," notes BBH Global Currency Strategy Team.

Key quotes: 

"Sterling posted its third largest advance of the year, rallying about 1.8% against the dollar, following a hawkish hold by the Bank of England.  The 7-2 vote to stand pat was not surprise.  What caught the market off guard was the hawkish assessment that "all policymakers" see as likely the withdrawal of monetary stimulus in the "coming months."   It underscored this by noting that rates may need to rise more than what the market was discounting."

"Sterling posted an outside up day and rallied to its highest level since early September 2016.  It poked through $1.34 and hung around there after the London market closed.  Our $1.3430 target, the 50% retracement of the post-referendum sell-off, has been approached.  The 61.8% retracement is found a little above $1.38.  The $1.3885 area corresponds to the 38.2% retracement of the larger down move that began in mid-2014 when sterling was peaked around $1.72."

"US August CPI rose 0.4%, a touch more than expected, and lifted the year-over-year rate to 1.9%.  The core rate increased by 0.2%.  This may sound like a dog bites man story, but today's report snapped a string of five core CPI reports below median expectations.  We had warned that the finished consumer goods component of the PPI report warned of upside risks, but in truth the highlight was the record rise in lodging costs (4.4%) and the largest increase in shelter costs since 2005 and the (5.1%) jump in hotel costs, the most since 1991.  There looks to have been some modest impact from the hurricane as data from two of the 87 urban centers were disrupted."

"The important takeaway is that the risk of a December Fed hike is gradually increasing.  We noted that earlier today, but it is even more true after the CPI.  Consider that a week ago, Bloomberg calculated that the odds implied by the Fed funds futures strip was a little less than 22% for a Dec hike.  Now it calculates the odds at a little more than 45%.  In the CME's assessment, the odds have risen from 31% to almost 51% today."  

"The US dollar found some traction, but nothing convincing, although the euro traded at new lows for the month (a little below $1.1840).  Many are skeptical of these recent developments.  In the foreign exchange market, dollar bounces on ideas of tax reform or more hawkish Fed policy creates opportunities for the dominant dollar bears."  

"The greenback toyed with JPY111, a level it has not closed above since late July.  It is also roughly the 50% retracement of the decline since the mid-July high near JPY114.40.  The 61.8% retracement is bound near JPY111.75.  Not that there is a one-to-one correspondence between a certain interest rate and dollar-yen level, but it is interesting to note that in mid-July when the dollar put in its recent high, the 10-year US yield was near 2.40%, about 20 bp higher than it is now, while the US premium over Japan was about 15 bp higher."