FX Matters November 2021 | Article – HSBC VisionGo
- Fed Chair Powell confirms FOMC will discuss faster taper in December
- BOE shocks markets with a 7:2 vote to hold rates
- New COVID-19 variant, Omicron, sparks sell-off in risk assets; oil tumbles 16.4%
Summary – USD bulls reign supreme
The USD outperformed most G10 currencies in November as strong US economic data and hawkish Federal Open Market Committee (FOMC) commentary ramped up expectations for the Federal Reserve (Fed) to hike rates earlier. US CPI reached an ‘eye-popping’ year-on-year rate of 6.2% in October, which triggered a sharp repricing of market rate hike expectations and hawkish-sounding remarks from various Fed officials. Meanwhile, virus fears returned after a new COVID-19 variant, Omicron, was identified on 26 November. As a result, markets held their own ‘Black Friday sale’ for risk assets, which saw traditionally ‘risk-on’ currencies like the NOK and AUD post hefty falls. Despite this, Fed Chair Powell confirmed on the final day of the month the FOMC will discuss “a somewhat faster taper” at the December meeting.
In contrast, the EUR languished in November, sliding 1.9% against the USD, as EUR-USD breached 1.12 for the first time since July 2020. The EUR’s weakness was largely driven by widening policy divergence between the European Central Bank (ECB) and the Fed. Eurozone Q3 GDP data showed a quarterly expansion of 2.2%, in line with expectations, while CPI inflation accelerated to 4.9% in November, up from 4.1% the month before. Focus also shifted to Europe’s worsening COVID-19 crisis as rapidly rising cases led Austria to impose a nationwide lockdown on 19 November.
The GBP also slumped 2.8% against the USD in November. On 4 November, the GBP plummeted below 1.35 after a shock decision by the Bank of England (BOE) to keep rates on hold at 0.10%, disappointing markets, which had priced in a 15bp hike ahead of the meeting. Support for GBP-USD eroded further as traders cut their BOE rate hike positions amid a strong rally in the USD. Nonetheless, the currency was briefly buoyed by the October year-on-year CPI print on 17 November, which showed UK inflation accelerated to 4.2%, the highest level in a decade. Even so, this was not enough to stop GBP-USD from drifting lower into the end of the month as risk appetite waned.
Elsewhere: ‘Mayhem’ in energy markets
Oil prices tanked in November, sinking 16.4% over the course of the month, as Europe’s COVID-19 crisis and the new COVID-19 variant, Omicron, sparked concerns about oil’s demand outlook. Meanwhile, gold prices benefited from a downturn in risk appetite and rising inflation fears. However, strong US economic data and hawkish remarks from FOMC members fuelled expectations for an accelerated Fed tightening path, which ultimately saw bullion pare earlier gains, ending the month down 0.5%.
 This report uses Bloomberg prices.
US: Faster taper in sight
The US Dollar Index (DXY) was ‘on a tear’ in November, reaching a 14-month high after climbing 2%, as strong economic data propelled Fed rate hike expectations and US Treasury yields higher. On 3 November, the Fed confirmed a widely anticipated taper of USD15bn per month, starting in mid-November. While it left the door open to alter the pace, the current rate implied net asset purchases should end by mid-June 2022. Fed Chair Powell signalled the Fed “can be patient” on raising rates but would not “hesitate” if necessary to keep inflation in check. The DXY slipped after Powell’s remarks.
Later that week, on 5 November, October non-farm payrolls outstripped consensus estimates for 450k, climbing by 531k, for the strongest gain since July 2021. Meanwhile, the unemployment rate inched down to 4.6% and average hourly earnings matched expectations. The jobs reading buoyed the USD, which rose 0.3% after the release. However, the real market mover was the US CPI report on 10 November, which showed US inflation accelerated 6.2% in October from a year ago, which was the fastest pace since 1990. With inflation running surprisingly hot, expectations for a faster taper and earlier rates lift-off intensified. The DXY rallied 1% in tandem alongside a surge in US Treasury yields, which pushed the 2-year yield up almost 10bp.
However, the USD’s rally took a breather on 12 November after the University of Michigan sentiment index unexpectedly plummeted to the lowest level in a decade on mounting inflation woes. The retreat proved brief, as the DXY climbed 0.5% on 16 November after October retail sales jumped 1.7% for the largest monthly increase since March 2021. Thereafter, markets shifted focus to US President Biden’s choice for Fed Chair, with Powell’s re-nomination on 22 November, reassuring USD bulls on the path of policy normalisation. Markets priced in a swifter taper and second rate hike into the November 2022 meeting, which buoyed the USD.
Meanwhile, hawkish Fed commentary firmed expectations for a swifter taper in December. The November meeting minutes showed “various participants” were open to a faster taper “if inflation continues to run higher”. Fed Chair Powell echoed this sentiment on 30 November, noting it now seems “appropriate” to wrap up tapering, “perhaps a few months sooner” than previously announced (CNBC, 30 November 2021). He confirmed the FOMC would discuss a faster taper in December, acknowledging price pressures had spread “much more broadly” as he decided it was time to “retire” the use of “transitory”. The DXY rallied 1.2% amid a jump in short-term US Treasury yields.
Eurozone: Policy divergence takes centre stage
With rising expectations for an earlier Fed rate lift-off, whilst the ECB is likely to stand pat on rates through 2022, a bearish drag was placed on the EUR as monetary policy looks set to diverge further. As a result, the EUR fell 1.9% against the USD over the month.
The start of November consisted of mostly sideways momentum in the EUR. However, on 4 November, the EUR slipped 0.5% amid broad USD strength as markets priced in widening policy divergence between the Fed and the ECB with the former set to begin tapering. But the majority of declines came later in the middle of the month. EUR-USD slumped 1% on 10 November, after US inflation ‘rocketed’ to a 30-year high, which likely upped the ante for the Fed to accelerate policy normalisation.
On 15 November, widening US-Germany yield differentials weighed on the EUR, which slumped 0.7% against the USD. Meanwhile, Austria’s decision to impose a national lockdown on 19 November heightened already mounting COVID-19 concerns. EUR-USD slid 0.7% on the day as pandemic fears bolstered the greenback in a rush for ‘safe haven’ currencies.
That said, the EUR managed to regain some ground towards the end of the month. On 26 November, the discovery of a new COVID-19 variant, Omicron, sparked fears of renewed global travel restrictions and saw traders rush to unwind rate-hike positions. The dovish repricing narrowed policy divergence between the ECB and the Fed, offering the EUR some relief as it climbed 0.8% against the USD amid short covering. However, the EUR relinquished gains in the final days of the month as risk sentiment continued to roil markets amid a hawkish tilt in Fed guidance.
UK: Dovish BOE shocks markets
The GBP fell 2.8% against the USD in November, as the BOE shocked markets with its decision to keep the policy rate unchanged. On 4 November, the BOE’s monetary policy committee (MPC) voted 7-2 to keep the policy rate at 0.10% and left its quantitative easing (QE) target unchanged (6-3 vote on the latter), disappointing markets, which had priced in a 15bp hike ahead of the meeting. The GBP and the UK government bond (i.e., gilt) yields plummeted in tandem. The currency fell 1.4% against the USD as it breached 1.35 for its largest drop so far this year.
BOE Governor Andrew Bailey noted market’s rate hike pricing was “overdone” and the MPC downgraded the growth forecasts, reflecting supply chain disruptions and a steeper yield curve (i.e., the spread between long- and short-term interest rates widens). The GBP did manage to repair some losses on 8 November, as it climbed 0.5% on broad USD weakness amid renewed positive risk sentiment. However, these gains evaporated soon after, as the GBP slipped 1.1% on 10 November amid a spike in the USD. There were also resurfacing Brexit concerns as the EU prepared retaliatory measures in case the UK suspended the Northern Ireland deal.
The GBP consolidated around 1.34 for the remainder of the month but enjoyed a temporary boost on 17 November, after October UK inflation reached the highest level in a decade. Soaring energy costs and broad supply shortages drove UK October CPI to 4.2% from a year ago, up from 3.1% in September. Meanwhile, UK labour market data released the day before showed a bounce of 160k in October payrolls after the UK government-funded job retention schemes for COVID-19 lockdowns (known as furlough schemes) ended. The inflation beat alongside reassuring labour market data firmed expectations for a 15bp rate hike in December. GBP-USD climbed 0.4% on the day, before drifting lower towards the end of the month amid broad USD strength.
Japan: Revisiting 2017 lows
The JPY outperformed its G10 peers in November, eking out a 0.8% gain against the USD as renewed virus concerns fuelled ‘safe haven’ demand. The JPY started the month advancing as uncertainty around the next Fed Chair gripped markets amid falling US Treasury yields. The drop in long-term yields, with the US 10-year Treasury bond yields slipping roughly 14bp to 1.43% by 9 November, extended the JPY’s outperformance. However, the JPY’s gains evaporated quickly the next day after the US CPI surprise spurred the spread on 2-year US-Japan government bonds to fresh year-to-date highs of 63bp. The widening US-JP yield differentials saw the JPY fall 0.9% against the USD.
On 16 November, the JPY weakened to a four-year low after the surprise in US retail sales bolstered the USD’s rally. USD-JPY drifted higher towards the end of the month, surpassing the 115 level, as US yields and the broad USD continued to extend gains. However, the news of the new COVID-19 variant and increasing pandemic-related restrictions saw heightened risk aversion near the end of November, which helped the JPY make gains and USD-JPY touch its lowest level since mid-October. Meanwhile, the domestic outlook remained tepid. Japan’s exports slowed again in October as global supply constraints continued to bite, rising 9.4% from a year ago and missing forecasts for a 10.3% gain. September core machine orders fell to 12.5% from a year ago, far below expectations for 17.6%.
China: Fairly unfazed by USD strength
The CNY was relatively resilient in November, slipping just 0.6% against a strengthening USD, while most G10 currencies saw more marked declines. On 10 November, China October PPI accelerated to 13.5%, registering the fastest pace in 26 years as costs of raw materials soared due to a spill-over from the rally in commodities. October CPI also rose sharply to 1.5% from a year ago, up from 0.7% in September. Although the CNY was unfazed on the day, the currency eventually succumbed to USD strength the next day with USD-CNY jumping from around 6.38 to 6.41. However, the tide turned on 16 November, when the CNY advanced to a five-month high and USD-CNY dipped below 6.37, after the Xi-Biden virtual summit fuelled optimism bilateral tensions may ease. Meanwhile, October industrial output rose 3.5% from a year ago, while October retail sales climbed 4.9% from a year ago amid easing energy shortages, beating forecasts. That said, new domestic COVID-19 outbreaks and Beijing’s property market crackdown continued to fuel uncertainty and weigh on the recovery. The CNY oscillated towards the end of the month around the 6.39 level, but Fed Chair Powell’s remarks on 30 November, affirming a faster taper will be considered in December, pulled USD-CNY down 0.4%.
Canada: Slipping on oil
The CAD fell 3.1% against the USD in November, faring better than other ‘risk-on’ G10 currencies. On 4 November, Canada’s trade surplus narrowed to CAD1.86bn, but this was less than expected as higher oil prices helped offset some export weakness in autos. Nonetheless, the CAD slipped 0.6% amid broad USD strength post-FOMC. The USD’s advance continued to weigh on the CAD, with USD-CAD climbing higher after the ‘eye-popping’ US CPI print on 10 November. Falling oil prices further exacerbated the CAD’s weakness. Nevertheless, the CAD found relief on 12 November as the USD trimmed gains on a drop in consumer sentiment, and again on 15 November, after the Bank of Canada (BOC) Governor Macklem said the central bank is “getting closer” to raising rates as slack dissipates. Towards the end of the month, mounting pandemic woes due to Europe’s worsening COVID-19 outlook, the US’s release of strategic oil reserves, and the discovery of a new COVID-19 variant, Omicron, on 26 November, eroded risk appetite and sent oil prices plunging 11.6%. As a result, the CAD slid 1.1% against the USD, and USD-CAD ended the month at 1.28.
New Zealand and Australia: Disappointing markets
The AUD slid 5.2% against the USD in November, dragged down by a dovish repricing of Australia’s rate hike expectations and a broadly stronger USD. On 2 November, the Reserve Bank of Australia (RBA) formally abandoned its yield target but kept its policy rate unchanged. RBA Governor Lowe also explicitly pushed back against markets, declaring current pricing to be “a complete over-reaction to the latest inflation data” as he dismissed the possibility of a 2022 rate hike (AFR, 2 November 2021). AUD-USD fell 1.3% alongside a notable drop in short-term Australian bond yields. The AUD continued to sink lower amid broad strength in the USD buoyed by a more hawkish Fed rates outlook. That said, the AUD found some relief on 12 November, gaining 0.5%, as the USD slid after the University of Michigan sentiment report missed estimates. However, these gains were soon relinquished and the AUD continued its one-way decline into the end of the month as risk appetite waned on renewed COVID-19 fears.
Meanwhile, the NZD fared slightly better, slipping 4.9% against the USD in November. Price action for the NZD was choppy in the first half of the month. The NZD climbed 0.7% against the USD on 3 November after New Zealand’s unemployment rate beat expectations and fell to a 14-year low, at 3.4% in Q3, amid a surge in hiring. On 8 November, New Zealand Prime Minister Arden further eased pandemic restrictions in Auckland and signalled a full exit from lockdown would be due by the end of November. NZD-USD rallied 0.7% on the day. However, these gains proved brief as the NZD tumbled 1% on 10 November after the USD surged following the US CPI surprise. The Reserve Bank of New Zealand (RBNZ) delivered a 25bp hike on 24 November, bringing its policy rate to 0.75%. While the bank signalled more tightening to come, RBNZ Governor Orr affirmed the RBNZ would remain cautious on future hikes, sticking to 25bp increments “for now”. NZD-USD slid 0.8% on the day, as the RBNZ fell short of delivering the 50bp hike some hawks were anticipating. However, the sharp move lower in NZD-USD was likely also due to growing expectations that New Zealand’s hiking cycle may not be aggressive enough relative to the Fed to outweigh USD strength.
Norway and Sweden: Feeling the pain
The NOK was the worst performer in the G10 space in November, falling 6.6% against the USD, as it erased gains from the past three months. The NOK pulled back 1.4% on 2 November, ahead of the Norges Bank meeting, as markets expected the central bank to stand pat on rates with much of the good news fuelling the NOK’s recent rally seemingly priced in. On 4 November, the Norges Bank left its key rate unchanged at 0.25%, in line with expectations. That said, Norges Bank Governor Olsen stated the policy rate would likely be raised in December. USD-NOK remained steady after the decision. On 10 November, the NOK slumped 1.6% against a surging USD following the US CPI spike. The data beat pushed oil prices lower, exacerbating NOK weakness. On 18 November, the Norges Bank surprised markets as it announced a suspension of NOK purchases for the remainder of the month due to larger-than-expected oil cash flows. USD-NOK gained 0.7% on the day. The NOK failed to stage a comeback by the end of the month as the USD rallied to a 14-month high. Domestic economic data painted a robust picture as Q3 GDP expanded 3.8% from a quarter ago and CPI inflation cooled to 3.5% in October from 4.1% last month.
The SEK finished November down 4.8% against the USD. In the first half of the month, the SEK mostly saw sideways price action but was eventually dragged down by the USD’s rally. On 25 November, the Riksbank kept its policy rate unchanged. However, the central bank was slightly more hawkish than expected as it projected its first rate hike in 2Q24. Whilst the Riksbank still considerably lags behind other major central banks, the rate path revision buoyed the SEK, which rose 0.4% versus the USD, as it signalled a small step in the direction of further policy normalisation. Domestic economic data showed a mixed picture with October retail sales up 5.2% from a year ago whilst industrial orders fell 0.9% in September over the same period last year, after rising 2.3% in August. CPI inflation also picked up in October to 2.8% from 2.5% last month.
Oil: Wiped out
Oil prices ‘cratered’ in November, falling 16.4%, as it retraced towards USD70 per barrel. On 3 November, Brent crude prices tumbled 3.2%, as pressure on the Organisation of the Petroleum Exporting Countries (OPEC) and its allies (known as “OPEC+”) to raise supply mounted alongside a larger-than-expected rise in US crude inventories. However, OPEC+ declined US President Biden’s calls to boost supply the next day and instead maintained the monthly schedule of daily increases. Oil prices spiked 4.1% on the news. However, Brent’s trajectory took a U-turn on 10 November as it was dragged down 2.5% by a stronger USD and surprise increase in US crude stockpiles. Oil prices slid further on 19 November, retreating below USD80 per barrel, as Europe’s COVID-19 crisis worsened with Austria imposing a national lockdown and Germany introducing restrictions. That said, crude briefly rallied on 23 November, rising 3.3%, despite the US announcing a coordinated release of 50m barrels from strategic reserves, which fell short of expectations. However, the largest ‘blow’ came on 26 November, after the discovery of a new COVID-19 variant sparked concerns about oil’s demand outlook and sent oil prices plunging 11.6%.
Precious metals: Tossing and turning
Gold got off to a strong start in November, climbing above USD1860 per ounce but ultimately pared gains and ended the month down 0.5%. Rising 2-year US Treasury yields after the 3 November FOMC meeting weighed on gold prices, which eased 1%. However, gold pared losses the next day following the BOE’s dovish decision to hold rates, which initiated lower US Treasury yields. The retracement in US yields from the post-FOMC high helped gold climb towards USD1800 per ounce. On 10 November, surprisingly ‘hot’ October US headline inflation spurred a 2.6% jump in gold prices to a five-month high, as investors rushed towards inflation hedges. However, gold prices pulled back the following week, after data showed October US retail sales grew at the fastest rate since March 2021, propping up the USD. That said, it was Powell’s re-nomination as Fed Chair, on 22 November, which saw most of the precious metal’s earlier gains evaporate as the news prompted a jump in the USD. In the final days of the month, the discovery of a new COVID-19 variant, Omicron, on 26 November, led to a drop in the USD as US yields slipped. This propped up gold temporarily, but Fed Chair Powell’s hawkish remarks on 30 November, confirming the discussion of a faster taper at the December FOMC meeting, dragged gold prices back below USD1800 per ounce.