Currency View by OFX

Last week’s news

• US corporate earnings season started on the right foot last week, boosting market sentiment and diverting attention from inflation and central bank rate hikes fears. The S&P 500 and Nasdaq 100 increased 1.82% and 2.2% respectively. The US dollar index fell only 0.14%, despite the positive tone in markets, explained by the relative underperformance of the euro and Japanese yen relative to the other majors. Commodity indices hit fresh highs, supporting commodity-linked currencies like the Australian dollar and the Canadian dollar.
• The Federal Reserve is poised to begin phasing out its pandemic-era stimulus programme as early as next month and wrap up the process by mid-2022, as the economic recovery advances and more officials pencil in an interest rate rise next year. Minutes from the FOMC September meeting showed officials firming up their support for the eventual end to the $120bn monthly asset purchase programme that has been in place since last year to bolster financial markets and the economy. The most recent employment figures out of the US were disappointing and whilst the Fed has previously said that the US jobs market will be a key indicator in the decision to boost rates, the Fed stated that it should not deter the central bank from moving forward with its policy adjustment next month.
• Eurozone industrial output fell back below pre-pandemic levels in August as supply chain bottlenecks restricted production of many products, such as German cars, raising concerns that the bloc’s economic rebound may be running out of steam. Many workers have been furloughed across Europe which led to a 1.6% drop in manufacturing production in August across the 19 Eurozone countries. Germany led the way with one of the biggest drops as production fell 4.1%. The overall Eurozone economy is still expected to grow at about 2.5% in Q3, boosted by a continued rebound in household spending, however some economists worry that this could be offset by the recent surge in European gas and electricity prices.
• The Japanese yen fell against all G10 currencies, followed by the US dollar. The US dollar only increased against the yen by 1.79%, but it fell 2%, 1.52%, and 0.81% versus the Kiwi dollar, Aussie dollar, and Canadian dollar respectively. The yen and US dollar’s safe-haven status did not help them; a surprise increase in US retail sales last month and corporate earnings strength bolstered risk appetite. The Kiwi dollar increased 3.81% versus the Japanese yen last week, which was the biggest move within the G10 pairs.
• The Australian dollar closed the week above 0.74, supported by an impressive jump in coal prices, easing restrictions in Sydney and Melbourne. Employment numbers on the other hand disappointed, with 138K jobs lost during September, but likely exacerbated by the lockdown in the 2 major cities. The NZ dollar also moved higher on the back of inflation data beating expectations, with RBNZ raising the cash rate by 25bps earlier this month the central bank is expected to continue on a raising path as inflation seems to be running hot. Markets are starting to price more than a 25bp interest rate hike on their next meeting (November 24th).

Looking ahead

• The USD/JPY pair broke out to the upside to the 112.00 level and it closed at ~2% higher over the last week and touched the mid-114 level last Friday. The bearish yen and bullish US dollar-yen drivers remain in place. Growth differentials are key factors in G-10 FX; however, the yen is highly exposed versus the euro and against commodity currencies such as the Canadian dollar or Aussie dollar. The surging global-yield story and Japan’s struggles on that front have contributed to recent yen underperformance, according to Bloomberg Intelligence.
• A larger than expected increase of 125 basis points by the Chilean central bank tells you that emerging markets have less patience than the Fed to increase rates. Chile went from a pandemic emergency rate setting of 0.5% to a level it now considers neutral (2.75%) in just three steps and less than 4 months. Before the pandemic, rates were at 1.75%. A broad emerging market tightening cycle is underway in response to higher inflation pressures.

Key market events this week

• Tuesday
  • CNH GDP Rate YoY (Q3)
  • AUD RBA Meeting Minutes
• Wednesday
  
  • GBP Core Inflation Rate YoY (Sept)
  • EUR Core Inflation Rate YoY (Sept)
  • CAD Core Inflation Rate YoY (Sept)
• Friday
  • JPY Inflation Rate YoY (Sept)
  • USD Markit Manufacturing PMI (Oct)