FX Weekly Insights — 18/10/21
Key Events
Monday
02:00 (CN) – Retail Sales (Actual 4.4%, Consensus 3.3%, Previous 2.5%)
Tuesday
00:30 (AU) – RBA Meeting Minutes
Wednesday
01:30 (CN) – PBOC Interest Rate Decision (Previous 3.85%)
06:00 (UK) – CPI (YoY, Sep.) (Consensus 3.2%, Previous 3.2%)
12:30 (CA) – CPI (YoY, Sep.) (Consensus 3.6%, Previous 3.5%)
Thursday
24h (EU) – European Council Meeting
19:00 (AU) – Governor Lowe’s Speech
Friday
07:30 (DE) – Markit PMI Composite (Oct.) (Consensus 54, Previous 55.5)
07:30 (DE) – Markit Manufacturing PMI (Oct.) (Consensus 56.5, Previous 58.4)
08:00 (EU) – Markit PMI Composite (Oct.) (Consensus 55.2, Previous 56.2)
10:30 (RU) – CBR Interest Rate Decision (Consensus 7%, Previous 6.75%)
12:30 (CA) – Retail Sales (Aug.) (Previous 0.6%)
RUB on the Ground
Most players are short USD/RUB now. The main arguments for a stronger RUB is if prices remain high for oil and gas, also the high probability of another rate hike at the next CBR meeting on October 22nd (RUB is probably the most attractive carry trade story across all EMs, and watch for the possible left-hand side conversion from exporters). The negative factors to watch remain the huge daily FX purchases by the CBR with accumulative effect, wider core rates and an overall shaky sentiment in emerging markets. Technically, a critically important level to look out for remains 71.50 (low of the last year).
Europe’s Natural Gas Crisis
Vladimir Putin denies that Russia is restricting gas supplies to Europe to drive prices up and to speed up the certification of the Nord Stream 2 Pipeline, that runs from Russia to Germany. Putin affirms that the contractual obligations of Gazprom, the Russian state-owned enterprise, had already been met, and that further gas supplies to EU partners should be negotiated again. This has been followed by accusations of Russia ‘weaponising’ gas, using it to further the country’s political interests. However, this has again been denied by the Kremlin.
Soaring gas prices and shortages are creating a serious energy crisis in the EU. As Europe is embarking on its carbon-neutral transition, the gas crisis figures to be a formidable obstacle. The EU and UK are increasingly dependent on gas supply from Russia because of their diminished gas production and storage facilities. The EU are looking at Russia to help mitigate the crisis by supplying more gas to its partners, which Putin is yet to do despite hints of increasing supply. This dependency is therefore calling into question the reliability of gas as a primary energy source. For Germany, who were energy independent, the gas crisis has put into question its policies of closing nuclear power plants and phasing out of coal, to instead become dependent on natural gas. Therefore, in the face of this crisis, countries like France and the UK have reaffirmed their position to increase the production of nuclear power, putting it at the heart of their net-zero climate transition. For France, nuclear power has allowed the country to avoid the severe gas price hikes that other EU countries experienced.
Chart of the Week - USD/CAD
Major Resistance: 1.2950
Resistance: 1.2514
Major Support: 1.2048
CAD & CAD crosses benefitting from firmer oil prices, stronger employment and a risk-on environment.