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]

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