FX Weekly Insights — 20/12/21

Key Events

Monday                                                                         Consensus/Previous

01:30 (CN)- PBoC Interest Rate Decision                           3.80%        3.85%

Tuesday

00:30 (AU) - RBA Meeting Minutes 

13:30 (CA) - Retail Sales (MoM) (Oct)                                1.00%        -0.60%

23:50 (JP) - BoJ Monetary Policy Meeting Minutes 

Wednesday

07:00 (UK) - Gross Domestic Product (QoQ) (Q3)            1.30%        1.30%

13:30 (US) - Gross Domestic Product Annualized (Q3)      2.10%        2.10%

Thursday

13:30 (US) - Core PCE Price Index (MoM) (Nov)              0.40%        0.40%

13:30 (US) - Durable Goods Orders (Nov)                         1.50%        -0.40%

13:30 (US) - Nondefense Capital Goods Orders                 0.50%        0.70%

                                    ex Aircrafts (Nov)

13:30 (CA) - Gross Domestic Product (MoM) (Nov)          0.80%        0.10%

Friday

00:00         - Christmas Eve, Merry Christmas from the Adamis Principle

Further Points:

Since the pandemic began central banks have injected $32tln into markets around the world, equivalent of buying $800m of financial assets every hour of the past 20 months according to Bank of America.

· Inflation is not ‘transitory’ but persistent although Morgan Stanley predicts a retreat that even though prices are likely to remain high next year, the rate at which they rise will peak in early 2022 as oil prices subside and supply chain issues ease.

· What next for China and Emerging markets? The problems in China’s property sector serves as a reminder of the fragility that can lurk in Asian corporate bond markets. Investors should also be braced for ‘significant downside risks’ in emerging markets if the severity of the virus proves to be worse than expected, particularly amongst the nations that still have largely unvaccinated populations according to M & G Investments.

RUB on the Ground

RUB - On Friday CBR as expected hiked the official rate by 100 bp with a relatively hawkish statement. As the market expected such scenario the reaction in both FX and interest rates was relatively muted. We believe that the FX flow was very light. There was an announcement on Friday for a Russian security request to the USA and NATO. These points (red lines) look simply unachievable and unrealistic and there was a negative reaction in RUB (USD/RUB finished Friday firmly above the 74 level despite a hawkish CBR). We feel the geopolitical risk will remain the main driver for the RUB until the end of the year. Please note the huge tax payments in the beginning of next week together with worsening liquidity due to Christmas period could help in slowing the RUB sell off, however dips in USD/RUB ahead of the local new year holidays (1-9JAN are public holidays in Russia) should be bought as a hedge for possible escalation.

Interest Rate Hikes: Central Bank of Russia and Bank of England

The CBR has raised its interest rates by 100 bp or to 8.5 per cent, the seventh consecutive increase this year, as it is has been facing heightened inflationary pressures. If the situation further worsens, the hawkish rhetoric of the CBR may point to the possibility of further hikes. Inflation has remained high in November, as headline CPI rose to 8.4 per cent year on year, from 8.13 per cent. Inflation was at 8.1 per cent on December 13, representing a six-year high. The bank is therefore expecting its policies to push annual inflation down to 4.0-4.5 per cent by the end of 2022 - rather than in the first quarter of 2022 as previously estimated -, reaching its 4 per cent target. The bank has planned its next meeting for February. The depreciation of the rouble against the dollar - 5.24 per cent - has also diminished the role of the rouble in curbing inflation through the FX channel. Geopolitical risk and high tensions between Russia and the US over Ukraine has had a negative effect on rouble assets.

The end of the week was also marked by the first interest rate hike of the Bank of England in more than three years. Interest rates were raised from 0.1 per cent to 0.25. The BoE has justified this hike saying high risk of inflation called for precautionary action, even though the UK is severely suffering from the increasing Covid-19 infection rates. The Omicron variant will have an impact on the economy for the end of this year, as well as in the first quarter of 2022, even though the scope is still unclear. With a tight labour market and increasing price pressures, there is a concern for inflation in the medium term, which might require the Monetary Policy Committee to go ahead with further moderate interest rate rises in the coming months to bring inflation down to the BoE’s 2 per cent target. Inflation forecasts have now been adjusted to 6 per cent in April 2022, up from 5 per cent

Chart of the Week - USD/CAD

Major Resistance: 1.2950

Resistance: 1.2900

Support: 1.2879