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]


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