Daily Market Outlook, November 1, 2021

Overnight Headlines

  • Biden Signals Confidence Congress Will Pass His Economic Agenda
  • Yellen: Reciprocal Lowering Of Tariffs Could Help Ease Inflation
  • Goldman Now Sees Fed Hiking Rates In July As Inflation Lingers
  • US And EU Agree Deal To Ease Tariffs On Steel And Aluminium
  • German Finance Minister-In-Waiting Demands Hard Line From ECB
  • Britain Steps Up Post-Brexit Dispute With France Over Fishing
  • China's Manufacturing Activity Expands Amid Weak Supply: Caixin
  • Japan's Ruling LDP Secures Sole Majority In Lower House Election
  • Australian Bonds Bounce To Erase Much Of Friday's Panicked Rout
  • Dollar Holds Firm As Fed Decision Looms; Yen Dips On LDP Victory
  • Oil Prices Fall After China Releases Reserves Of Gasoline, Diesel
  • Japanese Stocks Jump After Ruling Party Secures Election Victory

The Week Ahead

  • Central banks in focus as Fed, BoE and RBA meet Central banks take centre-stage this week with the Federal Reserve, Bank of England and Reserve Bank of Australia set to hand down policy decisions.The Fed is widely expected to announce it will taper its $120 billion monthly bond buying program by $15 billion. With recent U.S. data showing inflation pressures building, the market now expects the Fed to start contemplating rate hikes in the months ahead. The data will make it more difficult for Chair Jerome Powell to maintain his "inflation is transitory" line with confidence. Any hawkish tilt in the Fed's message should keep the U.S. dollar well supported. The BoE meets on Thursday and Refinitiv's BOEWATCH shows the market pricing in a 52% chance of a rate rise from the current 0.10%. The BoE has to weigh higher inflation against the fragility of the UK economy. If they hold off from hiking, sterling will likely fall – even if their guidance is clearly hawkish. Perhaps the most intriguing meeting will be Tuesday's RBA decision, with the Australian bond market mounting a huge challenge of the central bank's yield curve control policy. Most economists believe the market is running way ahead of itself in pricing the scale and speed of rate hikes, so it wouldn't be surprising to see the RBA push back against this view, though a change in forward guidance is likely; preview.
  • U.S. non-farm payrolls cap busy global data calendar This week's full calendar of top-tier data takes on increased importance with major central banks tightening or on the brink of tightening. U.S. non-farm payrolls for October on Friday will as usual be a key event for markets. The latest Reuters poll shows a median forecast of +413,000 jobs, while the unemployment rate is expected to fall to 4.7% from 4.8%. With inflation, especially wage inflation now a key metric for markets, the average hourly earnings component will be in focus; gains of 0.4% month-on-month and 4.9% year-on-year are expected. Other U.S. data includes ISM manufacturing and non-manufacturing, factory orders, trade, ADP jobs and weekly jobless claims. Euro zone PMIs highlight the European calendar in the week ahead. Other data includes unemployment, retail sales and producer prices, and German industrial orders and output. The UK only has PMI data due. China data includes Caixin PMIs and October trade numbers, following Sunday's disappointing official PMIs. Japan's calendar is limited to PMIs and household spending. Australia data includes building approvals, housing finance September trade balance and Q3 retail trade. New Zealand has unemployment data, while Canada is due to release PMIs, trade and employment data.

CFTC Data

  • Speculative traders trimmed their bullish bets on the USD for a third week running, taking the aggregate dollar long position, measured against the major currencies we monitor in this report, down USD1.8bn week over week to USD20.5bn. This remains a quite significant, but not excessive, USD long position that has ample room to grow.
  • The CAD saw the largest positioning change over the week. Gross CAD longs rose and gross CAD short positioning fell, resulting in a USD1.15bn swing in net positioning over the week to register a small USD268mn net long. Investors have been holding net CAD shorts since late August; the CAD has appreciated around 2.5% against the USD since then. Firm commodities and Bank of Canada policy tightening prospects should sustain and drive additional net long interest in the CAD.
  • Speculators may be warming to commodity FX; net NZD longs rose USD177mn to a modest USD638 while the huge net AUD short that has developed since April was trimmed again this week, albeit by just USD40mn. The overall position (equating to more than 75k contracts) remains near the recent all time peak (86k contracts), however and which still leaves the AUD prone to a short squeeze. MXN net speculative shorts continue to rise slowly (USD118mn), but surely, however, reaching a little over USD1bn (43.3k contracts, the largest net short since early 2017).
  • Investors remain bearish on the prime funding currencies; net EUR shorts were trimmed a modest (USD129mn) to USD1.6bn while investors added nearly USD500mn to the significant net JPY short of USD11.7bn (107k contracts, the biggest bearish bet on the JPY since late 2018). Net CHF shorts rose just over USD250mn to USD2.6bn (19.4k contracts, the largest CHF short since late 2019)
  • After chopping around flat since July, speculative accounts added a little more decisively to GBP positioning this week, amid speculation that the Bank of England may raise interest rates shortly. Net GBP longs jumped USD1.1bn to USD1.6bn and take net longs back to July’s level. Meanwhile, inflation worries are lifting interest in gold, with net longs advancing USD43bn.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1535 (251M), 1.1600 (400M), 1.1625 (919M), 1.1650 (208M)

USD/CHF: 0.9260 (270M), 0.9320 (858M)

GBP/USD: 1.3700 (305M)

AUD/USD: 0.7480 (433M), 0.7520-25 (323M), 0.7550 (361M), 0.7600 (500M)

USD/CAD: 1.2350 (747M)

USD/JPY: 113.65-75 (441M), 114.25-35 (260M). EUR/JPY: 129.90 (226M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.17 Bullish above

  • Steady in Asia but vulnerable after bearish outside week
  • EUR/USD opened 1.1565 after falling over 1.0% on Friday
  • Pair traded in a 1.1551/68 range in Asia and is 1.1555 into the afternoon
  • EUR/USD is vulnerable after completing a bearish outside week Friday
  • Support is at the Oct 12 low at 1.1522 and break targets 1.1490
  • Resistance is at the 21-day MA at 1.1598 and break eases downward pressure
  • EUR/USD unlikely to wander too far ahead of FOMC and US payrolls this week

GBPUSD Bias: Bearish below 1.37 Bullish above.

  • Tests key support – move below 1.3550 viable
  • Steady towards the top of a 1.3663-1.3687 range with occasional heavy flow
  • UK business sentiment slips but stays at elevated levels-Lloyds
  • Charts; 5, 10 & 21 day moving averages conflict, daily momentum studies slip
  • 21 day Bolli bands contract - positive setup has reverted to neutral
  • Oct upper 21 day Bolli rejection and close below 1.3696 21 DMA is bearish
  • Targets a test of the rising 1.3542 lower 21 day Bolli as seen in September
  • 1.3672, 38.2% of the October rise is close initial, and resilient support
  • Asian 1.3663 low and 1.3696 21 day moving average initial support resistance

USDJPY Bias: Bullish above 112.50 Bearish below

  • USD/JPY back up on 114 on USD rally Friday, Asia today 114.03-26 EBS
  • This despite lower long US rates, Treasury 10s @1.574% well below 1.60%
  • Risk on though as Japan's ruling LDP maintains majority in elections
  • Nikkei gaps up at open, from 29,267 to 29,633, now +2.2% @29,538
  • USD/JPY still seen heavy from @114.50, 114.69 spike high October 20
  • Even more JPY shorts out there according to CFTC data...
  • Option expiries not really a factor till Thursday, few large till Thursday
  • JPY crosses better bid? Some more than others, AUD/JPY 85.51-94
  • CAD/JPY 91.97-92.32, EUR/JPY 131.80-132.00 EBS, GBP/JPY 155.83-156.33
  • Japan Oct mfg PMI 53.2, flash 53.0, in expansion mode above 50

AUDUSD Bias: Bearish below 0.75 Bullish above

  • AUD/USD opened 0.7513 after closing Friday at 0.7520
  • Lower open likely due to weaker than expected China PMI on weekend
  • AUD/USD traded in a 0.7506/24 range and was around 0.7510 into the afternoon
  • Consolidation may continue ahead of key RBA decision tomorrow
  • Resistance at 200-day MA validated by repeated failures to break
  • Support is at the 10-day MA at 0.7502 and break eases upward pressure