FX Daily: One-way bets get harder into December

Two-way forces in DXY and EUR
Radhika Rao19 Nov 2021
    Photo credit: Unsplash Photo

    DXY corrected another 0.3% lower to 95.5. US stocks were mixed. Dow fell 0.2% but S&P 500 rose 0.3%. The action was in the Nasdaq Composite which rallied 0.5% on chipmakers. The US Treasury market was uneventful; 2Y and 10 yields did not stray far from 0.50% and 1.60% respectively. The market is awaiting US President Joe Biden’s decision on the Fed Chair. Jerome Powell is expected to keep his job but the market will turn dovish if the president picks Lael Brainard instead. The Senate Banking Committee is indifferent and is likely to confirm either candidate. In the end, it is the FOMC meeting on 15 December that will decide if markets are correct about the highest inflation since 1990 pushing the Fed to bring forward rate hikes to 3Q22 from late 2022.

    Today, Fed Vice Chair Richard Clarida will be discussing global monetary policy coordination, cooperation and collaboration at a virtual event hosted by the San Francisco Fed. The topic is a timely reminder because inflation has surged above-target in other countries and narrowed with US inflation. Although the USD is supported by the Fed’s hawkish tilt, currency markets will need to rotate between the Fed and other central banks’ normalization policies. Markets could also end up being pulled in two directions. Next month, we can see earlier Fed hike bets supporting USD into the FOMC meeting and ECB normalization expectations underpinning the EUR into the ECB meeting.

    EUR appreciated 0.5% to 1.1371 from the year’s lowest close of 1.1319 on Wednesday. The European Central Bank governing council meeting on 16 December is shaping up as an important event. Eurozone CPI inflation spiked to 4.1% YoY in October, more than twice the official target of 2%. Germany is increasingly uncomfortable with ECB’s ultra-loose monetary policy and wants the ECB to communicate a normalization strategy soon. The German Council of Economic Experts expects the German economy to return to pre-crisis levels in 1Q22 on a strong recovery next year. Speaking today is Bundesbank President Jens who is a long-time critic of the ECB’s loose policy and a believer that it cannot protect governments from higher borrowing costs indefinitely.

    NZD appreciated most by 0.7% to 0.7047. Conditions are right for a back-to-back rate hike at the Reserve Bank of New Zealand meeting on 24 November; the official cash rate should increase by another 25 bps to 0.75%. CPI inflation (3Q21: 3.9% YoY) and inflation expectations for the next two years (4Q21: 3.0%) surged to decade-highs while the unemployment rate (3Q21: 3.4%) dropped to a record low. NZD was also lifted by the plans to reopen domestic borders around Auckland on 15 December for vaccinated people. Although NZD held above 0.70 this week, it still needs to end today above 0.7060 to push higher towards 0.71. However, the New Zealand 2-year bond yield is high just above 2%, a sign the market has priced in more than the hike expected next week. Moreover, focus will turn to the FOMC and ECB meetings next month after the RBNZ meeting.


    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.