FX Daily: Delayed recovery, vulnerable markets

RBA and ECB could not eclipse Fed taper worries.
Philip Wee13 Sep 2021
    Photo credit: Unsplash Photo

    Investors are vigilant about a market correction on a delayed recovery. Last week, major US stock indices experienced the worst weekly declines since mid-June. According to the Atlanta Fed GDPNow model, US growth is projected to slow from 6.6% qoq saar in 2 Q to 3.7% in 3Q, slower than the 5.3% estimated at the start of September. America Inc is concerned that profitability might have peaked as margins come under pressure from the Delta-variant, high inflation, central banks starting to roll back its pandemic, and Congress pushing for higher taxes.


    Hence, risk appetite will take a hit if tomorrow’s US CPI inflation (5.3% yoy consensus vs 5.4% previous) surprises on the upside, just as PPI (8.3% actual vs 7.8% previous) did in August. The US 10-year treasury yield bounced off 1.30% last Friday despite the sell-off in stocks. As more Fed officials support tapering asset purchases this year, markets now believe an announcement is possible at the FOMC meeting on 22 September or 3 November. Against this background, EUR failed to rally on the European Central Bank’s decision to slow its pandemic emergency purchase programme in 3Q. Having retreated from its peak of 1.19 on 3 September, EUR is looking to test its 1.18 support and possibly revisit last month’s low beneath 1.17.


    GBP has been languishing around 1.38 with a downside bias in September, caught between two opposing forces. Support for GBP is coming from the market pricing in a more than 50% chance of a 15bps rate hike in February 2022 ahead of the Bank of England meeting on 23 September. On 15 September, consensus expects CPI and core inflation to jump to 2.9% yoy in August, well above the 2% target. On the other hand, GBP buckles whenever investor sentiment sours. The FTSE 100 is vulnerable if it breaks decisively below 7000. Real GDP started 3Q21 with a paltry 0.1% mom increase in July, its worst reading since January due to increased self-isolation from a surge in infections, labour shortages and supply disruptions, and higher taxes. Prime Minister Boris Johnson is scheduled to unveil his Covid Winter Plan today on how to live with Covid with vaccinations and to resort to lockdowns only as a contingency measure.


    Commodity currencies are most vulnerable to risk aversion. AUD is correcting lower after its rebound from 0.71 towards 0.75 over the past few weeks. AUD depreciated to 0.7356 last week despite the Reserve Bank of Australia staying the course to reduce bond purchases at its meeting on 7 September. As per CFTC data, speculative net short AUD positions reached 70k for the 7 September week, worse than the 54k posted at the start of the outbreak in March 2020. Speculators unwound their long AUD positions at a faster pace than they cut their short positions.


    Speculators turned net short CAD in September for the first time since December. CAD’s recovery stalled at 1.25 per USD and the currency has since depreciated above 1.26. The snap election on 20 September remains too close to call. The election is shaping up to be a referendum on Liberal Prime Minister Justin Trudeau’s Covid policy. Polls suggest that the opposition Conservative Party will win the most seats but fail to secure a majority.

    Philip Wee

    Senior FX Strategist - G3 & Asia

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