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Speculation that the Federal Reserve would have to taper bond purchases at a faster rate.

Posted: 22nd November 2021

Trade ideas & Daily market report November 22nd 2021

Market highlights.

  • Risk appetite dipped sharply ahead of Friday’s New York open with markets taking fright over European coronavirus developments.
  • There was speculation that the Federal Reserve would have to taper bond purchases at a faster rate.
  • Global bourses declined sharply, although sentiment stabilised later in the US session.
  • US bond yields dipped sharply on risk elements before recovering from intra-day lows.
  • The Euro came under sustained pressure with EUR/USD lows at fresh 16-month lows at 1.1250 before a slight recovery.
  • The dollar posted notable gains on the day with fresh 16-month highs with an element of defensive demand.
  • The Swiss franc strengthened sharply with EUR/CHF below 1.0500.
  • Sterling was able to post net gains on expectations over a Bank of England rate hike.
  • Commodity currencies were hurt by US dollar gains, although sentiment held relatively firm.
  • Oil prices declined sharply amid concerns that European coronavirus restrictions will undermine demand.
  • Precious metals were hurt by a stronger US dollar and lost ground.
  • Scandinavian currencies lost further ground.
  • Cryptocurrencies posted net gains over the weekend before sliding in Asia amid volatile trading.

EUR/USD

The Euro dipped sharply in early Europe trading on Friday. Austria announced that there would be a full lockdown in the country to combat the sharp increase in coronavirus cases. The situation in Germany also caused significant alarm with the threat of further restrictions. Fears over the Euro-zone outlook undermined the currency and the dollar secured net gains on defensive grounds. The sharp Swiss franc gains against the single currency also undermined the wider Euro performance.

ECB President Lagarde reiterated that the conditions for an increase in interest rates were unlikely to be met in 2022 and that it does not make sense to tighten monetary policy when inflation pressures are expected to fade. EUR/USD dipped to 16-month lows at 1.1250 before securing a tentative recovery.

Fed Governor Waller stated that inflation pressures are becoming more widespread and will last longer in 2022 than expected. He is also concerned that inflation will get embedded into wage demands. He added that he favoured a faster pace of tapering and a more rapid increase in interest rates. The overall tone from Waller was significantly more hawkish than previously and vice-chair Clarida also commented that a faster pace of tightening might be necessary.

The dollar was unable to capitalise on the more hawkish rhetoric and EUR/USD recovered to trade back above the 1.1300 level at the European close.

CFTC data recorded a fresh switch back to a short Euro position which could limit the potential for further near-term selling.

The dollar overall held firm on Monday and close to 16-month highs with coronavirus trends continuing to undermine Euro support with EUR/USD near 1.1270.

USD/JPY

US Treasuries rallied sharply as risk appetite dipped on Friday with the 10-year yield sliding to around 1.50%. Lower yields undermined the dollar and the yen also gained strong defensive support, especially given the extent of short positions. In this environment, USD/JPY retreated to lows at 113.80.

CFTC data recorded a significant reduction in short yen contracts to below 100,000 contracts, although there is still the potential for further short covering.

Markets will remain on alert for a US Administration announcement over who the Federal Reserve chair nomination with Biden expected to announce before the Thanksgiving Holiday whether Powell will get a second term or whether Brainard will be nominated instead.

Market conditions were relatively calm on Monday with Asian equities able to make limited net headway while US yields drifted lower amid hopes that supply-side pressures will start to ease. USD/JPY found some support below the 114.00 level and consolidated around 114.15 in early Europe with EUR/JPY around 128.70.

Sterling

Sterling dipped sharply after Friday’s European open with the currency undermined by the slide in risk appetite and sharp dollar gains.

Bank of England chief economist Pill stated that some patience will be required before inflation returns to 2%. He added that he did not know how he will vote in December. Pill added that that the first rate increase would not necessarily be 15 basis points and that the burden of proof on the back of recent data is on those not wanting to raise rates. GBP/USD did find support just above 1.3400 and the EUR/GBP rally was held around 0.8430.

UK Brexit Minister Frost stated that significant gaps remain across most issues. EU Commission vice president Sefcovic stated that the recent change in tone must lead to tangible solutions. GBP/USD rallied to above 1.3450 at the European close as rate speculation continued while EUR/GBP retreated to near 0.8400.

CFTC data recorded a further sharp increase in short Sterling positions in the latest week to over 30,000 contracts from 12,000 previously and the largest short position since June 2020. The positioning will increase the scope for a position squeeze if the currency strengthens.

In comments over the weekend, Bank of England Governor Bailey fuelled underlying uncertainty with comments that there is a two-sided debate over inflation.

GBP/USD settled just below 1.3450 on Monday with EUR/GBP held below the 0.8400 level and close to 20-month lows.

Swiss franc

The Swiss franc posted sharp gains in early Europe on Friday with EUR/CHF sliding below the 1.0500 level as the National Bank did not intervene to defend this important level.  The franc drew support from fears over European coronavirus developments. EUR/CHF dipped to 6-year lows at 1.0450 before recovering some ground later in the session. Moves against the dollar were relatively contained with USD/CHF around 0.9260 at the European close.

The franc edged lower on Monday with reservations over potential National Bank intervention and USD/CHF was close to 0.9300, but overall franc demand held firm.

AUD/USD + USD/CAD

The Australian dollar dipped sharply in European trading on Friday with the combination of a stronger US dollar and weaker risk conditions.

AUD/USD dipped to lows near 0.7230 before stabilising.

Domestic developments were limited on Monday with AUD/USD recovering to around 0.7250 as Chinese reservations eased slightly.

The Canadian dollar was also hurt by the stronger US dollar and oil prices declined sharply. In this context, the Canadian currency was broadly resilient with USD/CAD settled around 1.2640 from highs just above 1.2660.

There was little change on Monday in the pair with markets monitoring oil prices and risk developments.

NOK+ SEK

The Norwegian krone was subjected to further selling pressure on Friday with a more vulnerable risk tone and further considerations of the Norges Bank halting short-term currency purchases.

EUR/NOK strengthened to highs near 10.08 in choppy trading.

EUR/NOK edged lower to 10.04 on Monday with USD/NOK just above 8.90.

The Swedish krona was able to resist further selling on Friday with EUR/SEK settling just below the 10.10 level in choppy trading.

EUR/SEK settled just below 10.10 on Monday with USD/SEK around 8.96.

Equities

Euro-zone equities were unsettled by renewed concerns over coronavirus developments as fresh restrictions were imposed and the global risk tone was also less confident. Lower oil prices also sapped confidence.

The German DAX index declined 0.4% with a 0.6% retreat for the Eurostoxx 50 index.

Major UK stocks continued to lose ground on Friday with further concerns over the threat of higher interest rates with selling pressure amplified by a slide in oil prices and reservations over coronavirus developments. The FTSE 100 index losses were, however, held to 0.45%.

Wall Street stocks lost ground on Friday with reservations that stronger inflation pressures would force the Federal Reserve to tighten monetary policy at a faster rate. Optimism over earnings did cushion major indices with a 0.15% retreat for the S&P 500 index.

US futures edged higher on Monday and Asian markets held steady.

Japan’s Nikkei 225 index posted a slight 0.1% advance while the Australian ASX index retreated 0.6% amid reservations over commodity prices.

China’s Shanghai index posted a 0.6% gain, but Hong Kong stocks declined again with a 0.5% retreat in the Hang Seng index in late trading.

Commodities

Oil prices declined sharply on Friday with a significant impact from concerns over European coronavirus developments which could undermine demand. Dollar strength and US pressure for increased supply also undermined confidence

Overall, WTI declined sharply to below the $76.0 p/b.

Overall sentiment remained fragile on Monday with WTI dipping to 7-week lows and trading just below the $76.0 p/b level despite a slight recovery and Brent around $78.70 p/b.

There was volatile trading across the commodities complex with precious metals undermined by a stronger US dollar while US yields recovered from intra-day lows.

Gold retreated to below $1,850 per ounce with silver sliding towards $24.50 per ounce.

Gold remained on the defensive on Monday and traded around $1,845 per ounce on Monday with silver around $24.75 per ounce.

Cryptocurrencies

After sharp declines in Asian trading on Friday, cryptocurrencies posted net gains on Friday.

Bitcoin posted net gains as trades moved into alternative assets as equities came under pressure.

Bitcoin strengthened to highs near $58,500 before a limited correction. There was a fresh surge on Saturday and further buying efforts during Sunday with bitcoin peaking at the $60,000 level.

There was little change in bitcoin CFTC positioning in the latest week, but bitcoin declined sharply in Asia with a slide to below $57,000 before stabilising.

Ether also posted notable net gains to a peak around $4,400 before sliding to below $4,200 on Monday.

Calendar

Major events for the day ahead: (times in GMT)

08.30 (Tues): German PMI index (flash reading)