FX Trends October 2021| Ripe for reversal | Article – HSBC VisionGo

Ripe for reversal
Finance  ·    ·  9 mins read

  • Market hawkishness drove the AUD, CAD, and GBP overshoot, so these currencies are likely to consolidate (or even reverse gains) in the weeks ahead
  • The USD may bounce should the FOMC highlight a hawkish risk case
  • The GBP is vulnerable if the BOE fails to validate market pricing

USD: The USD is likely to respond favourably to the 2-3 November Federal Open Market Committee (FOMC) meeting, in our view. The start of the taper has been well flagged, but the fact that it is underway would still put the Federal Reserve (Fed) ahead of some other central banks in its shift to the exit. Consider too the USD’s reaction if the language around the taper pace is that it could be accelerated if necessary. A central narrative will remain of data-contingency which means Q3 GDP (advanced estimates) on 28 October will be of market interest, as will the 10 November CPI release for October, and the ever pertinent employment report on 5 November. Yet, there has not been a great deal of drama in the US data generally, with our economic surprise indices moving sideways in aggregate even if there have been some outliers in the employment report. Perhaps, once the November FOMC is passed, the focus will move back to the US fiscal issues. Be it fiscal stimulus negotiations or debt ceiling, we expect the “safe haven” USD to be supported. In short, we see the USD strengthening over the near term, in part because of what happens elsewhere, but also because of the likely tone from the Fed.

EURRecent comments from the European Central Bank (ECB) speakers, such as Chief Economists Philip Lane and Governing Council member Francois Villeroy de Galhau, point to the view that inflation pressures are transitory (Bloomberg, 20 October). Yet, this has mostly failed to dissuade the market of its hawkishness. Dovish guidance at the European Central Bank (ECB) meeting on 28 October may carry more gravitas than the recent rhetoric. A focus on greater QE flexibility would also be in contrast to a likely Fed taper. All this should point to a weaker EUR, in our view. Yet, we will be mindful of the risk of a hawkish counter-offensive in the aftermath of the ECB meeting.

GBPThe Bank of England (BOE) has not deterred the market’s drift to price in a November hike, but the GBP is vulnerable to a more dovish outcome at the BOE meeting on 4 November, in our view. A likely punchy October inflation release on 17 November (which will capture the impact of higher utility costs) could reinvigorate the hawks at least temporarily. On the fiscal front, the Budget and Spending Review on 27 October should not be impactful on the GBP, and it is likely to remind us that the tone of fiscal policy for the coming years is likely to be one of ensuring finances are put back on track after the necessary largesse of pandemic spending. All this suggests a challenging few weeks ahead for the GBP, in our view.

JPY: We look for the JPY to recover some of the ground lost recently. US Treasury yields remain the key driver, but the JPY could also benefit from any risk aversion that a less dovish Fed might foster. With the recent fixation on the stagflation theme, it became all about yields for the JPY as markets repriced their rate hike expectations for pretty much everyone apart from the Bank of Japan which will meet on 28 October. HSBC’s positioning indicator on USD-JPY and EUR-JPY are stretched to the topside, and our long-term valuation analysis result also suggests that the JPY is the most undervalued of all G10 currencies. As such, we expect reversal lower in USD-JPY in the weeks ahead.

CHF: The balance of risks points to CHF weakness in part because the currency’s recent strength is a little puzzling, in our view. One upside risk for the “safe haven” CHF would be renewed US debt ceiling concerns, while Swiss National Bank’s (SNB) intervention remains a threat. Swiss inflation data for October, to be released on 2 November, is likely to continue to show subdued underlying inflation and even a subdued headline rate. Where markets may be flirting with the idea of accelerated rate hikes elsewhere, the SNB faces no such pressure even if there has been a hawkish drift in pricing.

CADWe look for USD-CAD to move higher as the Bank of Canada (BOC) rhetoric at the 27 October meeting is unlikely to validate the market’s current hawkish pricing. Secondly, for current levels to be validated it does not just need the BOC to hike, it needs it to hike soon. Our economists continue to expect the BOC’s first hike of the cycle will wait until July 2022. Oil prices will remain part of the equation for the CAD in the coming weeks. It is possible that oil prices extend a rally that has been running in earnest now for 18 months, and is enjoying some momentum, but our oil and gas analysts see oil prices dropping next year as US supply returns.

AUD: We expect AUD-USD to consolidate near recent highs and see the pair trading sideways over the near term, given many positive catalysts (such as gradual economic reopening amid vaccination rates and higher rate expectations) are somewhat priced in. For sustainable gains in the AUD, it may rely on the Reserve Bank of Australia (RBA) shifting away from its current dovish stance. The RBA’s October minutes reiterated the board still does not see the conditions required for raising rates being met “before 2024”. On 22 October, the RBA announced an unscheduled operation to buy AUD1bn of the April 2024 bonds in the first such purchase since 26 February, to defend its 3-year bond yield target. The RBA has given little indication it plans to turn less dovish and affirm the market’s expectations at the 2 November meeting.

NZD: We think NZD-USD may extend higher in the weeks ahead. The Reserve Bank of New Zealand (RBNZ) is more likely to affirm market pricing with a rate hike at its 24 November meeting, as New Zealand’s CPI data for Q3 came in much stronger than expected, at 4.9% YoY, for the fastest rate seen since 2011. In the current environment, the central bank may not need to outdo the market’s expectations for NZD to outperform, in our view. The NZD is the best performing G10 currency since its 6 October meeting, where the RBNZ seemed to affirm, rather than exceed, market pricing. Terminal rates pricing and rate differentials are also attractive for the NZD.  

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