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]

    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

    The information herein is published by DBS Bank Ltd and/or DBS Bank (Hong Kong) Limited (each and/or collectively, the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.  The information herein is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation.  The information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. 

    This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) which is Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at [email protected] for matters arising from, or in connection with the report.

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank Ltd., Hong Kong Branch, a company incorporated in Singapore with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  11th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.