Daily Market Outlook, October 27, 2021

Overnight Headlines

  • NZ Imports At Record For Third Month As Global Prices Rise
  • China Industrial Profit Growth Accelerates In Sept Despite Cost Pressures
  • China-Aus Wine Dispute: WTO To Investigate China Tariffs On Aus Wine
  • Japan Ruling Parties May Win Stable Majority, Kyodo Survey Shows
  • Corporate Minimum Tax Resurfaces As Democrats Hunt For Money
  • US Pres Biden Plan Expected To Include At Least $500Bln For Climate
  • UK Chancellor Sunak To Commit To Fiscal Discipline In Budget
  • Mexico Economy Likely Contracted In Q3, Banxico’s Heath Says
  • Yuan’s Rally Likely To Be Replaced With Two Way Moves - CSJ
  • Australia April 2024 Yield Hits Highest Since RBA Curve Control
  • Oil Edges Lower After Mixed Industry Report On U.S Inventories
  • Coal Stockpiles Drop To Lowest Since 1997 At U.S. Power Plants
  • Gazprom Offered Moldova Gas Deal In Exchange For Weaker EU Ties
  • Asia Stocks Decline Wednesday Driven By Losses In Tech Sector
  • Microsoft Beats Quarterly Revenue Estimates On Cloud Boost
  • Alphabet Beats Sales Estimates On Google Advertisement Surge
  • Advanced Micro Devices Forecasts Revenue Above Estimates
  • Visa Q4 Fiscal Profit Rises On Increased Travel, Online Spending

The Day Ahead

  • Asian equity markets are lower this morning. In Australia Q3 headline CPI inflation fell to 3.0%y/y (from 3.8% in q2) but the core measure rose to 2.1%, which is back inside the central bank’s target band. GfK German consumer confidence rose unexpectedly in November to its highest level since April 2020, a sign that consumer spending will continue to pick-up.
  • The Budget is the key economic event in the UK today. The Chancellor of the Exchequer will be able to report some positive news on the economy and public finances. The Office for Budget Responsibility (OBR) is expected to revise its economic growth forecast for 2021 from its update in March. As a partial offset it may lower its expectation for 2022, but potentially less economic scarring may point to an earlier return to pre-pandemic output levels and more favourable medium-term assumptions. Thanks mainly to the resulting stronger-than-expected tax receipts, government borrowing for 2021/22 is expected to be well below the March prediction of £234bn, and will probably be nearer £200bn, down from £320bn in 2020/21.
  • The data will provide the Chancellor with some room for manoeuvre and there have been indications that he will make use of this. Reports point to higher capital spending, including an extra £6bn of investment spending for the NHS and £7bn for transport schemes in larger cities. He also seems set to provide some support to help offset ‘cost of living’ increases. A 6.6% hike in the national living wage and an end to the public sector pay freeze are other measures expected today.
  • However, given that the budget deficit and debt levels are still well above where they were pre-pandemic the Chancellor is expected to be cautious. According to press reports, he may announce new fiscal rules that target a balanced current budget by the end of this parliament in 2024/25. Overall, the bottom line is that the Budget is expected to be broadly fiscally neutral.
  • Today’s Bank of Canada policy update is likely to see a further reduction in monetary policy stimulus. The BoC has already started to taper its asset purchases and seems set to go further and potentially halve its weekly pace of asset purchases. Interest rates are expected to be left unchanged, but with markets expecting three 25bp hikes by summer 2022, a key issue is whether the BoC pushes back against these expectations.

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: 1.1600 (1.5BLN), 1.1605-10 (300M), 1.1615 (557M), 1.1630 (347M)

1.1650 (351M), 1.1675 (397M) 1.1685-1.1700 (1.35BLN)

- GBP/USD: 1.3700-15 (364M), 1.3795-1.3815 (322M), 1.3860 (217M)

- EUR/GBP: 0.8480-85 (320M), 0.8515-25 (639M)

- AUD/USD: 0.7400 (1.25BLN), 0.7430 (608M), 0.7450 (604M)

0.7500 (710M), 0.7530 (605M)

- NZD/USD: 0.7200 (337M). USD/CAD: 1.2375-85 (622M)

- USD/JPY: 113.35 (440M), 113.50-55 (1.8BLN), 113.85 (355M), 114.50 (758M)

- EUR/JPY: 131.00 (396M), 132.00 (731M)

Technical & Trade Views

EURUSD Bias: Bearish below 1.17 Bullish above

  • Hovers around 1.1600 but remains heavy
  • EUR/USD opened -0.13% at 1.1596 after USD mostly firmed against the majors
  • It traded in a narrow 1.1592.1,16004 range in Asia with small volumes
  • EUR/USD remains heavy, as ECB Thursday is expected to repeat dovish message
  • Minor support is at the 61.8 of the 1.1522/1.1670 move at 1.1578
  • A break below 1.1575 targets a full retracement to 1.1522
  • Resistance is at the 10-day MA at 1.1616 a break eases the pressure

GBPUSD Bias: Bearish below 1.37 Bullish above.

  • Respects Tuesday's low ahead of UK budget news
  • Cable holds above 1.3759 (Tuesday's low) pre-UK budget news from 1130 GMT
  • Sunak to boost investment/keep grip on spending
  • Tuesday's low was plumbed after another topside failure around 1.3831
  • 1.3742 (Monday's low) is a support point below 1.3759
  • BoE is expected to raise rates by 15 bps to 0.25% next week (Nov 4)
  • BoE hike would expose Treasury/Central Bank tangle

USDJPY Bias: Bullish above 112.50 Bearish below

  • Eases back from o/n high with US yields, risk mood
  • USD/JPY eases back from 114.31 high o/n, Asia 114.22 to 114.03 EBS
  • Risk off in Tokyo, most of Asia, US yields soggy too
  • Treasury 10s well off recent 1.705% high, @1.627%, Nikkei -0.6% @28,946
  • USD/JPY back below ascending 200-HMA at 114.06, 100-HMA 113.88 below
  • Option expiries help contain - 113.50-85 $2.6 bln, 114.45-80 $1.25 bln
  • JPY crosses mixed, AUD/JPY better bid on strong CPI, 85.53-86.05
  • NZD/JPY 81.56-89, GBP/JPY 156.96-157.26, CAD/JPY 91.96-92.19, all steady
  • EUR/JPY tad heavier, 132.27-46

AUDUSD Bias: Bearish below 0.75 Bullish above

  • Moves higher after hotter Aus core CPI
  • AUD/USD opened +0.15% at 0.7502 after moving higher on AUD/JPY flows
  • It was around 0.7510 when Aus CPI was released and jumped to 0.7536
  • The focus was on the core-CPI which was hotter than expected
  • Aus yields pushed higher as market prices in RBA rate hikes
  • Sellers ahead of 0.7550 discouraged further gains and it settled at 0.7525
  • Key resistance at the 200-day MA at 0.7560 and break targets fibo at 0.7663