FX Weekly Insights — 22/11/21

Key Events

Monday                                                                        Consensus/Previous

          (JP) – Labour Thanksgiving Day

01:30 (CN) – PBOC Interest Rate Decision                                        3.85%

21:45 (AU) – Retail Sales (QoQ)                                                            3.30%

Tuesday

08:30 (DE) – Markit PMIs (Nov)

09:00 (EU) – Markit PMIs (Nov)

09:30 (UK) – Markit Services PMI (Nov)

18:00 (CA) – BoC’s Beaudry speech

Wednesday

01:00 (NZ) – RBNZ Interest Rate Decisison                      0.75%        0.50%

02:00 (NZ) – RBNZ Press Conference

13:30 (US) – GDP Annualised (Q3, flash)                          2.10%        2.00%

13:30 (US) – Durable Goods Orders (Oct)                          0.20%.      -0.30%

13:30 (US) – Non-Defense Capital Goods ex-Aircraft, Oct. 0.6%.        0.80%

15:00 (US) – PCE (YoY)                                                     4.10%         3.60%

19:00 (US) – FOMC Minutes

Thursday

         (US) – Thanksgiving Day

12:30 (EU) – ECB Monetary Policy Meeting Accounts

Friday

         (AU) – Retail Sales s.a (MoM, Oct)                            2.50%        1.30%

Further Points:

-Will PCE inflation data on Wednesday add to the case for a US interest rate rise?

-How will UK and eurozone business activity fare on Tuesday? The UK is expected to show resilience although some moderation.

RUB on the Ground

-Geopolitics and EU lockdowns weigh on RUB today

-USD/RUB is +1.25% higher as the West continues to speculate about an invasion of Ukraine

-Next topside levels to watch in USD/RUB are 74.5861 / 74.8061 (dating back to July 2020 levels)

ECB, Inflation & Interest Rates

As the ECB has been following an expansionary monetary policy, questions are arising as to when it will stop buying bonds, and when it will raise its interest rates from their very low levels. The ECB’s minutes of last month’s policy meeting will be published on Thursday, and are expected to shed some light on what will be discussed and decided in the next policy meeting on December 16th. The ECB’s $1.85tn bond-buying program is set to end in March 2022. It has pledged not to raise rates until it stops buying bonds at the point of issuance, therefore next month’s meeting will be incredibly decisive. Some investors are predicting rates will rise by the start of 2023.

With inflation at 4.1% in October — therefore above the 2% target set by the ECB — there is uncertainty as to how long high inflation will last before coming down to the targeted level, or below it. The President of the Bundesbank, Jens Weidmann, has called for the implementation of tighter monetary policy, similarly to the US Federal Reserve and the Bank of England. Inflationary pressures are mainly being caused by rising energy costs and supply-chain bottlenecks. For Christine Lagarde however, the ECB should not react to these inflationary pressures, and is calling for further patience as she believes these shocks will fade in the medium term. Furthermore, tightening monetary policy in the midst of these two shocks could hamper the economic recovery process from the pandemic. The newly instated Covid-19 related restrictions in Austria, Germany or the Netherlands due to the upsurge of the 5th wave, are also supporting Lagarde’s efforts to delay tightening monetary policy, and could therefore calm markets fearful of the effects of these new Covid-19 restrictions on economic growth. Eurozone government bonds were given a boost following these restrictions, with German 10-year bond falling to minus 0.32 per cent, the lowest level in two months. With the end of the bond-buying program in March 2022, there are expectations for the ECB to mitigate the impacts on bond markets. Next month’s meeting will provide important indicators as to the timeline of the first interest rate rise.

Chart of the Week - USD/CAD

Resistance: 1.2726

Support: 1.2589

"If you are the last USD bear standing (not many left!) then you can turn the lights out. But before you go take a look at The Loonie. There's a growing case to buy it. Why? BOC is more hawkish than The Fed, Oil largely firm - also there's a chance it might decouple from the rest of the CRB complex. CAD is technically cheap on a few levels (mainly long term/fair value/SD) but the key reason I like this is because of CB policy. BOC is not doing AIT so making up for undershooting is NOT on the table. That means the doves get shut out because inflation needs to remain at 2% - or thereabouts. No chance of over cooking the goose. Finally, jobs have completely recovered to pre-pandemic levels and the participant rate looks peachy. Macklem will act much sooner if he thinks there's less slack in the economy and CPI gets sticky. The only thing troubling me is the round trip USDCAD made the last BOC hawkish surprise meeting. Long CAD positioning not helping the buying cause."