FX Daily: Fed comes out on top in managing market expectations


USD is eyeing year’s high; Fed topped G10 policy credibility.
Philip Wee05 Nov 2021
    Photo credit: Unsplash Photo


    One thing was clear from the central bank meetings over the past fortnight. The Fed was best at preparing markets for its decision to taper asset purchases at its FOMC meeting on 3 November. DXY ended Thursday on 94.3 and could revisit the year’s highest close of 94.5 on 12 October on a positive US monthly jobs report today. Consensus expects a rebound in nonfarm payrolls to 450k in October from 194k in September. The 4-week moving average of initial jobless claims fell to 285k from 341k for the comparable period. ADP employment came in at 571k in October, more than the 523k jobs added a month earlier. A fall in the unemployment rate to 4.7% from 4.8% should lift average hourly earnings growth to 4.9% YoY from 4.6%. 

    Meanwhile, the US 10-year treasury yield eased to 1.526% from 1.603%. Apart from lower bond yields after the Bank of England’s meeting, WTI crude oil prices closed below USD80 per barrel for the first time since 8 October. The White House is expected to tap its strategic reserves after OPEC+ rejected its call to supply more crude oil and decrease prices from seven-year highs. Yesterday, OPEC+ kept to the schedule agreed in August to increase oil production at a gradual pace of 400k barrels per day every month until the end of 2022.

    The Bank of England shocked markets most at its meeting on 4 NovemberGBP plunged to 1.35 from the day’s high of 1.37 on a fall in the 2-year gilt yield to 0.50% from 0.70%. The 10-year yield eased less to 0.94% from 1.08%. On Wednesday, we warned that the 15bps rate hike fully discounted by markets was ill-conceived. We noted that the Financial Times and Guardian newspapers did not see the case for a rate hike. The monetary policy committee voted 7-2 to leave the bank rate unchanged at 0.10% and 6-3 to keep purchasing gilts. Although the BOE forecast inflation to rise from 3.1% in September to a peak of 5% in April 2022, it warned that supply disruptions would restrain GDP growth, especially consumer demand, more than its projection in August. Hence, the BOE will be looking for vindication from the 3Q GDP report on 11 November; consensus expects growth to slow significantly to 1.5% QoQ sa in 3Q from 5.5% in 2Q. While some short-covering is possible after yesterday’s sell-off, GBP is likely to set its sights on the year’s low at 1.34.

    Perception gaps over monetary policy also weighed on other G10 currencies. AUD depreciated to 0.74 from 0.7430, two days after the Reserve Bank of Australia gave in to markets and ended its yield curve control policy. However, the RBA resisted pressure to aggressively bring forward rate hikes which it now sees possible in 2023 instead of 2024. EUR is lower at 1.1555 from 1.1680 a week after the European Central Bank meeting. The ECB is probably the strongest believer in transitory inflation and insisted that the reduced pace of bond purchases was a recalibration and not a tapering of its pandemic emergency purchase programme. CAD depreciated to 1.2456 per USD from 1.2360 on 27 October when the Bank of Canada ended asset purchases abruptly.





     

    Philip Wee

    Senior 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.