As we expected yesterday, US CPI came in at the highest level in the last decade. This has caused a stagflationary tilt to market prices recently, with capital retreating from most geographies and gold rallying:

We see this in our currency bloc monitor as well. Particularly, exporting and producing countries in the Yuan Bloc saw some strength alongside gold:

As mentioned in Monetary Monitor, we think we are around the peak of the inflation cycle in the US, and we expect inflation to stabilize at slightly lower levels (but elevated) for the rest of the year.  This isn’t the case for the rest of the world (particularly Europe), where we expect higher inflation through the year:

Given this backdrop of potentially higher inflation globally- markets continue to price a rising growth and inflation environment. However, we think that this global environment is increasingly stabilizing at higher levels rather than accelerating. In such a backdrop, we expect global equities to be a winner relative to global commodities.

Turning to what’s ahead of us this week, we think the BOJ meeting, in particular, should be important. USDJPY has been on a tear upwards this year, as the BOJ continues to provide huge monetary stimulus to keep the Japanese economy from falling into a deflationary spiral. The monetary impulse remains extremely large in Japan relative to GDP, and given the poor COVID containment that has hampered the economy, we don’t expect the BOJ to move meaningfully. Therefore, we continue to expect more of the same from USDJPY. We show USDJPY through the lenses of our Trading Tools Report below:

As a refresher on our lenses:

  • Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

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