Daily Market Outlook, October 28, 2021

Overnight Headlines

  • Brazil Reveals Biggest Interest Rate Rise In Almost 20 Years
  • Australia's Central Bank Declines To Buy Target Bond As Yield Jumps
  • Australia Q3 Export Prices Rise 6.2% Q/Q As Coal Surges
  • Australia’s Biggest Bank Now Sees First RBA Hike In Nov ’22
  • Japan’s Retail Sales Climb As Shoppers’ Virus Fears Ease
  • China Warns U.S. That Support for Taiwan Poses ‘Huge Risks’
  • New Zealand Announces Phased Easing Of Border Restrictions
  • ECB Expected To Push Back Over Mounting Rate-Hike Expectations
  • Asian Currencies Weaken; S.Korean Won, Philippine Peso Fall Most
  • Oil Extends Decline on U.S. Stockpiles Gain as Commodities Drop
  • China's Winter Natural Gas Demand To Rise 10% From Year Earlier
  • Bond Curves Flash Warning On Growth As U.S., U.K. Yields Slide
  • Stocks Get Reality Check From Earnings, Central Banks In Focus
  • Samsung Electronic Q3 Profit Rises To 3-Year High On Chip Sales
  • Airbus Raises Targets, Rejigs Near-Term Aviation Production Goals
  • Ford Motor Posts Stronger-Than-Expected Profit, Raises FY Forecast
  • EBay Earnings Beat Expectations, But Forecast Underwhelms Market

The Day Ahead

  • Asian markets are lower this morning following yesterday’s declines in Europe and the US. President Biden plans to meet Democrat Congressional leaders ahead of his trip to Europe amid signs that passage of his fiscal package has stalled. Yesterday’s UK Budget update contained few surprises as most of the main details had been pre-announced. Stronger than previously expected economic growth allowed Chancellor Sunak to announce both a rise in government spending and lower borrowing figures.
  • Today’s update from the European Central Bank is not expected to see any changes in monetary policy for the Eurozone. There may be some hints on what might replace the Pandemic Emergency Purchase Programme (PEPP) after next March, but it seems more likely that details will be provided after the next meeting on 16th December. What will be interesting is what ECB President Lagarde says about prospects of significantly higher inflation in the short term than it predicted only in September. So far, she and many ECB officials have sounded relatively relaxed and more comfortable with the view that rise will prove ‘transitory’ than many other central banks. Nevertheless, this week’s Eurozone CPI data for October are likely to show inflation continuing to rise sharply.
  • Ahead of tomorrow’s release for the region as a whole today’s figures for Spain and Germany are forecast to see inflation at multi-year highs. In Germany the outturn is likely to be the highest since the early 1990s. However, the ECB will probably take some solace from the fact that ‘core’ inflation (excluding food and energy prices) is still considerably below the headline rate. Also of interest in the Eurozone will be October business confidence readings. Last month saw confidence down in services but, perhaps surprisingly given ongoing concerns about supply chain bottlenecks, up in manufacturing. Given indications that supply disruptions remain a key issue confidence in both is expected to have fallen this month.
  • In the US, Q3 GDP quarterly growth is predicted to have slowed to about 3.5% annualised down from 6.7% in Q2. As US GDP is now back above its pre-pandemic level some slowdown was inevitable. However, the sharper and expected deceleration reflects the impact of supply issues and possibly consumers becoming more cautious. Next week the US Federal Reserve will need to weigh this up along with evidence of higher inflation in reaching its latest decision on monetary policy.
  • Government bond markets saw some sizeable moves yesterday. Yield curves flattened as longer dated yields fell sharply but shorter dated yields rose in some cases as markets factored in concerns about a more aggressive tightening in monetary policy. In currency markets sterling edged down against both the euro and the US dollar

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 )

- USDJPY - 114.60 466m. 113.70/80 3.03bn (1.89bn P). 113.50 426m. 112.90/113.00 1.73bn (1.49bn P).

- EURUSD - 1.1650/70 942m. 1.1620/30 881m. 1.1600/10 1.77bn (1.17bn P). 1.1500 586m.

- AUDUSD - 0.7500 680m. 0.7470 1.02bn (924m C). 0.7370 655m.

- USDCAD - 1.2390/1.2400 510m. 1.2350/70 1.98bn (1.31bn C). 1.2300/10 616m.

- USDCHF - 0.9170/80 650m.

- USDCNH - 6.45 503m. 6.39 809m.

Technical & Trade Views

EURUSD Bias: Bearish below 1.17 Bullish above

  • Pivots around 1.1600 ahead of ECB
  • EUR/USD opened 1.1603 and traded in a 1.1589/1.1609 range
  • Heading into the afternoon it is trading at 1.1605/10
  • Market was very quiet ahead of the ECB meeting later today
  • Market not expecting any change to the ECB's dovish guidance at this meeting
  • EUR/USD support at 61.8 of 1.1522/1.1670 move at 1.1578
  • A break below 1.1575 targets full retracement to 1.1522
  • Resistance is at 10-day MA at 1.1617 and top formed around 1.1625

GBPUSD Bias: Bearish below 1.37 Bullish above.

  • GBP/USD within strike of 1.3750 as France – UK row heats up
  • Cable gravitates to 1.3750 option expiry as tensions soar between France-UK
  • France seizes a British trawler as fishing licence row heats up
  • The 1.3750 strike rolls off at 1400 GMT
  • 1.3709-1.3759 was Wednesday's post-UK budget range (1.3759 = NY low Tuesday)
  • 1.3709 approximates to last week's low (1.3711 was pre-budget low Wednesday)
  • 1.3829 was Tuesday's high -- before M&A news hurt the pound

USDJPY Bias: Bullish above 112.50 Bearish below

  • USD/JPY remains heavy into London, month – end flows still
  • Month-end position adjustments still weighing on USD/JPY
  • Asia 113.87 to 113.50 EBS, spike low yesterday 113.29
  • More downside possible but expect more Japanese bids on way down
  • Lower US long yields weigh but front-end yields higher, attractive?
  • Option expiries in area today could still help contain action
  • 113.00 $1.5 bln, 113.50-70 total $1.2 bln, 113.84-85 $1.25 bln
  • Large in area tomorrow too, 113.75-114.00 $1.7 bln, to help cap?
  • Most of Asia risk-off, Nikkei -1% at TSE close to 28,820.09

AUDUSD Bias: Bearish below 0.75 Bullish above

  • Choppy as iron ore slide offsets rise in Aus yields
  • AUD/USD opened +0.23% at 0.7519 and came under pressure
  • Frustrated longs pared back as slide in iron ore provided excuse
  • Dalian iron ore was down over 6% at one stage and AUD/USD fell to 0.7479
  • Aus yields soared again today after RBA failed to buy the April 2024 bond...
  • Market took lack of intervention as a change in the RBA dovish outlook
  • Market is now pricing in four rate hikes by the end of 2022
  • The sharp rise in Aus yields helped push the AUD/USD back to 0.7510
  • Support is at the 10-day MA at 0.7478, which was validated today
  • A close below 0.7475 would suggest upward momentum is waning
  • Key resistance is at the 200-day MA at 0.7559 with sellers ahead of 0.7550