Currencies Tumble as Inflation Worries Grow 

Risk appetite soured on Tuesday as the Dow Jones Industrial Average closed lower for the first time in 9 trading days. The simultaneous decline in currencies and Treasury yields confirms experts’ view that investors are growing concerned about high inflation.

USD/JPY dropped to its lowest level in nearly a month.  This is not because of the impact on US rates but because of the impact on the economy.

Producer prices rose 0.6% in October, in line with market expectations. Although, core PPI and the year over year rate growth was slightly weaker than anticipated, at 8.6% wholesale prices grew at its fastest pace in more than a decade

The problem is that the pace of growth isn’t keeping up with the pace of inflation and that’s what makes experts worry. Yields are falling and stocks are falling because investors are concerned that consumer pocketbooks will be pinched by higher prices this holiday season.

The supply chain problem could prove to be even more troublesome as less inventory drives up prices. This means that consumers will have to dip into their savings or spend less. Thanksgiving is approaching in the US and according to agriculture experts; the costs for turkeys are up as much as 25% due to shipping and labor constraints. Some markets are subsidizing the difference to get customers into their shops but only if they spend more on other goods that have also increased in price.

JPY crosses were hit the hardest with AUD/JPY and NZD/JPY leading the slide. That’s no surprise because AUD and NZD are particularly sensitive to risk appetite. Australian business confidence and New Zealand credit card spending increased sharply in the month of October.

Australian consumer confidence numbers are due for release on Wednesday and analysts continue to expect confidence to be bolstered by warmer weather and fewer restrictions. Inflation numbers are due from China as well and like the US, prices are expected to have increased sharply last month.

EUR ended the day unchanged despite dovish comments from European Central Bank officials. According to ECB member Knot, conditions for a rate hike is not unlikely to meet in 2022.

The latest economic reports from Germany were mixed. While the country’s trade surplus increased, exports declined and imports rose less than expected. The current conditions component of the German ZEW survey fell sharply but the expectations component increased.

The Eurozone index also ticked higher, a sign that investors are still optimistic about the recovery. The CAD shrugged off a sharp recovery in oil to end the day unchanged against the greenback.

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