FX Daily: Less risk tolerance after risk rally


Supply-side constraints on slower growth and high inflation this week.
Philip Wee25 Oct 2021
    Photo credit: Unsplash Photo


    The negative impact from persistent supply-side constraints in slowing economic growth and keeping inflation high will be on the minds of central bankers and investors in the final week of October. USD could regain its composure if stock market sentiment wanes amidst higher bond yields. US equity futures are looking open weaker on Monday after record highs in the Dow and S&P 500 last week. The US 10-year treasury yield revisited 1.70% for the first time since May and is expected to hold above 1.60%.

    Many G10 countries are set to join China in reporting slower GDP growth. US will kick off on Thursday with 3Q GDP growth decelerating to an annualized 2.8% QoQ from 6.7% in 2Q. On Friday, EU growth is set to moderate to 2.1% QoQ sa from 2.2%, and Canada to 4.3% YoY from 4.7%. Last week, China’s growth slowed to 4.9% YoY from 7.9%.

    Discomfort will remain elevated over high and persistent inflation. On Friday, consensus expects US PCE deflator to pick up to 4.4% YoY in October from 4.3% in September; core inflation is seen rising to 3.7% from 3.6%. Fed Chair Jerome Powell acknowledged that supply-side constraints might last longer and lead to entrenched inflation expectations at businesses and households. US Treasury Secretary Janet Yellen believes US inflation will stay high through 1H22 before easing in 2H22. The Fed has paved the ground to start tapering asset purchases at the FOMC meeting on 3 November. Sharing the Fed’s view on rolling back Covid-led monetary stimulus, the Bank of Canada might taper at its meeting on 27 October. USD/CAD probably bottomed at 1.23 after it fell from 1.29 this month.

    GBP’s rally stalled around 1.38 alongside the FTSE 100 index at 7200 even though the market discounted a 15bps increase in the Bank of England’s bank rate to 0.25% on 3 November. Although UK CPI inflation slowed to 3.1% YoY in September from 3.2% in August, BOE Governor Andrew Bailey warned that action was needed on inflation. BOE Chief Economist Huw Pill reckoned inflation would rise slightly above 5% in early 2022 before coming off in 2H 2022. However, business leaders told MPs that the supply chain crisis will extend into 2023 with small businesses suffering most from labour shortages and price increases. The threat posed by accelerating inflation to government debt will also be on the mind of Chancellor of the Exchequer Rishi Sunak when he presents Autumn Budget 2021 on 27 October. Covid cases are rising again with UK having one of the highest infection rates in the world; the reimposition of restrictions this winter cannot be ruled out.

    EUR/USD has been in a 1.1620-1.1670 range since 19 October. EUR will be caught between a weaker EUR/JPY (like other JPY crosses vs AUD, NZD and CAD) and a higher EUR/GBP if risk appetite falls. At its governing council meeting on 28 October, the European Central Bank is probably more convinced than its peers that inflation is transitory. EU CPI inflation out the next day is expected to accelerate to 3.7% YoY in October from 3.4% in September. However, core inflation is set to be unchanged at 1.9% and below the official 2% target. Also released on 29 October, the ECB Survey of Professional Forecasters should see the ECB completing its Pandemic Emergency Purchase Programme in March 2022 and holding off rate hikes until 2023 or later. Longer-term, EUR is vulnerable from an ECB that is dovish against the Fed and the BOE.

     




    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]



    Subscribe here to receive our economics & macro strategy materials.
    To unsubscribe, please click here.

     

    The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. This research is prepared for general circulation.  Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof. The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies. The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. 

    DBS Bank Ltd., 12 Marina Boulevard, Marina Bay Financial Centre Tower 3, Singapore 018982. Tel: 65-878-9999. Company Registration No. 196800306E. 

    DBS Bank (Hong Kong) Limited, a company incorporated in Hong Kong with limited liability.  18th Floor, The Center, 99 Queen’s Road Central, Central, Hong Kong SAR.


    The information set out in this website ("Information") is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of or located in any locality, state, country, or other jurisdiction (including but not limited to citizens or residents of the United States of America) where such distribution, publication, availability or use would be contrary to law or regulation. This Information is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction (including but not limited to the United States of America) where such an offer or solicitation would be contrary to law or regulation. This Information is published for general circulation only and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person. Visitors accessing this website should always seek advice from an independent financial adviser regarding the suitability of the Information referred to herein (taking into account the specific investment objectives, financial situation and/or particular needs of each person in receipt of the Information) before making any investment and/or any purchase in reliance of the Information. Please refer to the actual research publications for important disclaimers and disclosures, where applicable.