FX Daily: Lots of noise around central bank meetings


Sharp reactions have been short-lived so far.
Philip Wee29 Oct 2021
    Photo credit: Unsplash Photo


    DXY fell from 94.0 but found support around 93.3 or its 50-day moving average. Advance US GDP growth slowed more-than-expected to 2.0% QoQ annualized in 3Q; consensus expected a fall to 2.6% from 6.7% in 2Q. However, S&P 500 and Nasdaq Composite rallied 1.0% and 1.4% to new record highs. Investors looked past the 3Q GDP miss and were encouraged that 4Q was starting on a positive note. For example, the Conference Board consumer confidence index recovered to 113.8 in October; it fell throughout 3Q to 109.8 in September from 128.9 in June. Three Fed districts – Dallas, Richmond and Kansas – reported increased manufacturing activities in October this week. Yesterday, US initial jobless claims fell to a new pandemic low of 281k in the week ending 16 October from 291k a week earlier. 

    This week’s fall in the DXY emanated from a spike in the EUR from 1.1580 to 1.1680 after yesterday’s ECB governing council meeting.During the post-meeting press conference, ECB President Christine Lagarde stood by the central bank’s analysis that inflation was transitory and that the conditions were not met for rate hikes next year. However, markets were convinced that central banks needed to do more to address inflation after the Bank of Canada prioritized reining inflation over slowing growth at its meeting on Wednesday. In Australia, speculators lifted the 3-year government bond yield from 0.80% to 1.20% in the past two days. Some expect the Reserve Bank of Australia, at its meeting on 2 November, to push back against market expectations for an early end to its yield curve control policy. The 3-year yield has since eased back towards 1% this morning; AUD is also lower at 0.7530 from yesterday’s high of 0.7556. Similarly, NZD pulled back from its 0.7217 peak to below 0.72 this morning; the NZ 2-year yield fell to 2.075% from its 2.162% high. Notably, USD/CAD did not revisit its 1.23 low after the BOC meeting and is still well within its 1.23-1.24 range established since mid-October. GBP has not deviated far from 1.38 ahead of tempered rate hike expectations at the Bank of England meeting on 4 November. Consensus now expects the bank rate to rise from 0.10% to 0.175% instead of 0.25% earlier.

    EUR might also be capped around 1.17 or its 50-day moving average. Today, Lagarde’s transitory inflation case will strengthen if EU core inflation stays unchanged at 1.9% YoY in October and below the official 2% target, even as the headline CPI inflation estimate rise to 3.7% from 3.4% in September. EU GDP could also disappoint like the US; consensus expects growth to slow to 3.5% YoY in 3Q from 14.3% in 2Q. The Bundesbank is looking to significantly downgrade Germany’s full-year growth from its forecast of 3.7% made in June. Unlike the US, the Bundesbank does not expect activities in Germany to improve but to slow again in 4Q. Against this backdrop, EUR bulls might be disappointed if the respondents in today’s ECB Survey of Professional Forecasters keep the ECB well behind the Fed and its peers in bringing forward taper and rate hike expectations.

    Given that markets are event-driven around central bank meetings, DXY could regain its composure at the FOMC meeting on 3 November. The Fed is widely expected to start tapering asset purchases through mid-2022. Since the FOMC meeting on 22 September, when the Fed’s summary of economic projections penciled a rate hike in late 2022, the 2-year US treasury yield has doubled to almost 0.50% from 0.25%. Hence, pay attention to the Fed’s favorite inflation gauges today. Consensus expects the US PCE deflator to increase to 4.4% YoY in September from 4.3% in August, and for core PCE inflation to rise to 3.7% from 3.6%, both well above the official 2% target. 







    Philip Wee

    FX Strategist - G3 & Asia
    [email protected]
     


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