FX Daily: Caution increased with risk appetite

Looking over the shoulder in DXY, GBP and SGD
Philip Wee21 Oct 2021
    Photo credit: Unsplash Photo

    DXY fell farther below 94 to 93.6 on improved risk appetite but support is around 93.3. Dow achieved a new record high of 35,670 intra-day but ended the overnight session at 35,609. The highest lifetime close was unchanged at 36,625 on 16 August. Similarly, S&P 500 ended at 4,536, shy of its record high of 4,546 on 2 September. Nasdaq Composite fell 0.1% but held above 15,000 for a third session. Although third quarter US corporate earnings overcame unfavourable conditions to beat expectations, stagflation concerns have not gone away. The Fed’s Beige Book reported that labour and supply shortages moderated US growth amidst elevated inflation. The market turned cautious on today’s US initial jobless claims; consensus expects a modest rise to 297k for the 16 October week from 293k a week earlier. With expectations intact for the Fed to taper asset prices at the FOMC meeting on 3 November, the US 10-year treasury yield extended its rise above 1.60% by another 2 bps to 1.657%. 

    GBP appreciated 0.2% to 1.3824, above 1.38 for the first time since mid-September. Higher risk appetite offset the slower-than-expected UK inflation data. Despite higher energy prices and supply constraints, UK CPI inflation fell to 3.1% YoY in September from 3.2% in August; core inflation slowed to 2.9% from 3.1%. The 2-year gilt yield fell 4.9 bps to 0.684% while the 10-year yield declined 2.1 bps to 1.148%. However, the market is convinced the Bank of England would lift its bank rate by 15 bps to 0.25% at its meeting on 4 November. The Chancellor of the Exchequer is expected to increase the minimum wage and end the freeze on public sector salary at his Budget and Spending Review on 27 October. Provided it does not slip below its 100-day moving average at 1.3805, GBP needs to overcome a trendline resistance at 1.3860 to reach its 1.39 high in September.

    USD/SGD is lower at 1.3430 this morning compared to 1.3480 a week ago when the Monetary Authority of Singapore surprised with a decision to slightly increase the slope of its SGD NEER policy band. Stay cautious as USD/SGD nears the floor of the 1.34-1.37 range established after the Fed’s shift to a hawkish tilt in June. The Fed remains on track to taper asset purchases in early November. Domestically, the Singapore Health Ministry extended Covid restrictions by another month to 21 November and warned that the healthcare system might be overwhelmed. Externally, China is bracing for “mounting downward pressure on growth” (citing the PBOC) after the miss in 3Q GDP. USD/CNY’s fall below 6.40 yesterday might be transitory. 

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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