He conditioned this on the October CPI data coming in hot for the third month in a row, which it subsequently did.
The comments and the CPI print contributed to a 20bp rise in short-dated Treasury yields and a 7bp flattening in the 2-10 year curve.
The case is increasingly building for the Fed to take rates into restrictive territory to slow aggregate demand and bring inflation back to target.
Bearish flattening of the US yield curve as the Fed takes rates into restrictive territory is normally good for the dollar against activity currencies.
But Friday's October PPI data could deliver the latest instalment of hot price data and keep the dollar bid.
The Fed's Chris Waller tossed a hawkish grenade into money markets early yesterday with his threat to vote for a 50bp rate hike at the 9 December FOMC meeting. He conditioned this on the October CPI data coming in hot for the third month in a row, which it subsequently did. The comments and the CPI print contributed to a 20bp rise in short-dated Treasury yields and a 7bp flattening in the 2-10 year curve. The case is increasingly building for the Fed to take rates into restrictive territory to slow aggregate demand and bring inflation back to target. That has been the stated aim of Fed Chair Kevin Warsh since his first FOMC press conference in June. While Waller's suggestion of a 50bp hike in December may be too aggressive for many of the FOMC voters who favour gradual tightening, his comments keep alive the prospect that the Fed needs to hike three more times.
What does this mean for FX? Bearish flattening of the US yield curve as the Fed takes rates into restrictive territory is normally good for the dollar against activity currencies. Here, activity currencies underperform as the world's most important central bank wants to slow aggregate demand. We did kind of see that price action yesterday, with the Norwegian krone and Swedish krona underperforming in a strong dollar environment, although the Swiss franc this year always suffers in a higher interest rate environment. That was the case yesterday.
Given what could be an accelerating US labour market, core inflation well above target and a Fed ready to pull the trigger again, we expect the dollar to stay strong and explore the top end of trading ranges over the coming weeks.
Don't expect too much from today's session given that it is the US Veterans Day public holiday. But Friday's October PPI data could deliver the latest instalment of hot price data and keep the dollar bid.
DXY should remain near recent highs and could be retesting big resistance at 102.85/103.00 sooner rather than later.
Chris Turner
