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Jump In Rates Does Little For Sterling, Canadian And New Zealand Dollars

By Marc ChandlerForexOct 18, 2021 06:17AM ET
Jump In Rates Does Little For Sterling, Canadian And New Zealand Dollars
By Marc Chandler   |  Oct 18, 2021 06:17AM ET
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Weak growth impulses from China and a continued rise in energy prices greets the new week. Equities were struggling. Hong Kong, Japan, South Korea, and Taiwan fell in Asia Pacific activity. Europe's Dow Jones Stoxx 600 was about 0.5% lower near midday, while US futures indices were also nursing small losses.

Crude was trading at new highs that puts November WTI above $83 and Brent above $85 a barrel. Benchmark 10-year yields were mostly 4-6 bp higher. A larger than expected jump in New Zealand's Q3 CPI lifted its 10-year yield 15 bp. BOE's Bailey continued to press with hawkish rhetoric, sending the yield of the December short sterling futures contract up 16 bp today.

However, the dollar rode higher in the foreign exchange market, and sterling and the kiwi were softer. The JP Morgan Emerging Market Currency Index snapped a five-week slide last week but was off about 0.25% today, led by the South African rand (~-0.85%) and the Mexican peso (~-0.75%).

Gold was turned back last week after briefly trading above $1800. It was extending the retreat today to approach $1760. China's iron ore prices fell for the fourth consecutive session, and steel rebar prices fell 1%. On the other hand, copper, which rallied 10.6% last week, was extending the gains today to approach the year's high set in May. 

Asia Pacific

China's data disappointed, and economists have already begun revising down this year's growth prospects. The economy reportedly grew by 0.2% in the quarter for a 4.9% year-over-year rate. Both were weaker than expected. The September details were soft, but retail sales held in better than the production and investment components and the "surveyed jobless rate" slipped lower.

Industrial production rose 3.1% year-over-year, missing the median forecast (Bloomberg survey) of 3.8%. It rose 5.3% year-over-year in August. Investment in fixed assets slowed from an 8.9% year-over-year rate to 7.3%, also below expectations. Property investment was also weaker (8.8% year-over-year vs. 10.9% in August). Retail sales rose 4.4% year-over-year after a 2.5% pace previously and above the median forecast for a 3.5% increase.

The unemployment rate eased to 4.9% from 5.1% amid expectations for an unchanged reading. In the second half of 2019, the "survey unemployment rate" was about 5.2%. Note that the same US investment bank that recently said that the Fed would not hike rates next year has also shifted its view of the PBOC away from a cut in reserve requirements this year. The 10-year Chinese benchmark yield rose to 3.03% today, a three-month high as others also appear to have given up the expectation.

The jump in New Zealand's Q3 CPI sent ripples across the New Zealand debt market. The yield on the December T-bill futures jumped 16 bp in the day session and rose  another four basis points, what is regarded as Tuesday's session as the market adjusts its expectations for next month's RBNZ meeting. The 10-year bond yield rose 15 bp. Consumer price rose 2.2% in Q3 quarter-over-year. The median forecast in Bloomberg's survey anticipated a 1.5% pace. Instead, the year-over-year rate jumped to 4.9% from 3.3%, well above expectations.

The RBNZ meets on Nov. 24. The cash rate was at 50 bp. The swaps market had a 25 bp hike discounted and was halfway toward pricing in another 25 bp move. This mirrored the guidance of the central bank where the RBNZ head of research said, "In our opinion, the data strongly demand a more aggressive approach...than espoused in August,"  than that the odds of a 50 bp move jumped to "just a tad under 50:50." Meanwhile, rising infections led to the extension of the lockdown in Auckland for at least two weeks.

The dollar was consolidating its strong advance against the yen. It has held above JPY114.00 but was below the three-year high set before the weekend (~JPY114.45). The band of resistance extended to JPY115.00. The intraday momentum indicators warned of continued consolidation.

The Australian dollar was flirting with its upper Bollinger® Band last week as it moved above $0.7400. Initial support was seen near $0.7380, and a break could signal another half-cent pullback. After briefly trading above $0.7100, the New Zealand dollar reversed lower and fell to almost $0.7050. Support was pegged around $0.7030.

The greenback was in a narrow range against the Chinese yuan, inside the pre-weekend range. The PBOC set the dollar's reference rate tight to expectations (CNY6.4300 vs. CNY6.4301), dampening ideas that a fix last Thursday was a protest against the renminbi's strength.


Yesterday, the Bank of England Governor Bailey said the BOE will "have to act" to check rising prices. He seemed to soft-pedal his conviction that the recent jump in prices is temporary by suggesting that the surge in energy prices would push it higher and longer. While acknowledging that monetary policy cannot address supply-side challenges, it must act if it risks medium-term inflation and inflation expectations.

The implied yield of the  December 2021 short-sterling interest rate futures contract rose 15 bp over the past two weeks and another 16.5 bp today as the market prices were in a good chance of a hike as early as the next BOE meeting on Nov. 4. It would be the first G7 central bank to hike.

The UK reports September CPI figures on Wednesday. The year-over-year rate is expected to be unchanged (Bloomberg survey) at 3.0% for the CPI, including owner-occupied housing costs. The core rate may ease to 3.0% from 3.1%. Separately, note that UK COVID infections are at their highest level in about three months.

It seems that it is nearly a given that the ECB's Pandemic Emergency Purchase Progam will be allowed to expire as planned at the end of next March. The debate has shifted to what it will do afterward. Its Asset Purchase Program was being used before the pandemic. It is not as flexible as the emergency facility, and the self-imposed caps were, part of the reason it was ruled within the ECB's mandate.

One such constraint is that it does not purchase Greek bonds, which are not rated investment-grade, though the PEPP did. The Financial Times reported that some ECB officials were advocating buying more EU bonds. The EU was issuing around 80 bln euros of bonds this year and will almost double next year. Currently, APP holdings of supranational are capped at 10%.

The broad outline of the basis for the new coalition government in Germany was taking shape. The influence of the Greens and increased concern about the environment was seen in a commitment to exit coal by 2030, eight years earlier than currently planned. In addition, the government will commit to an action plan to enhance efforts to protect the climate.

The liberal (as in free-market) Free Democrats secured an agreement to leave the constitutional deficit limits intact. A formal decision to take the talks to the next level was likely today or tomorrow. We suspect Scholz is sympathetic, but it does suggest that environmental action plan may be established off-balance sheet.

Formal negotiations will begin, and a new government is expected to be in place before the end of the year. Some US media accounts seemed mortified that it will take around three months to get a new government. This does not seem particularly long by European standards. Meanwhile, senior nominations to State and Treasury in the US are being blocked to force the Biden administration to renew sanctions on the Nord Stream 2 pipeline participants, which has yet to be certified by German authorities.

The euro struggled last week to sustain gains above $1.1600, although it managed to barely do so ahead of the weekend. It came back offered today. Recall that last Monday, the euro recorded its low for the year, thus far, slightly below $1.1525. It gave back half of the gains scored off that low last week, and a break of the $1.1560 area warned of a retest of the low and perhaps, the retracement objective of last year's rally (from Mar. 23, 2020 to Jan. 6, 2021) found near $1.1490.

Despite the jump in UK rates, sterling was nursing minor losses as it consolidated last week's 1% gain. It found a bid below $1.3720 in the European morning. Support was seen in the $1.3670-$1.3700 area. The euro fell to new lows for the year against sterling at the end of last week, a little below GBP0.8425. It was consolidating in a narrow range near it today. Note that the 2019 and 2020 low was set close to GBP0.8280.


The US reports September industrial production. Supply chain disruption may have limited activity. The median forecast in Bloomberg's survey expects a 0.2% increase in output after a 0.4% gain in August. Manufacturing itself may eke out a 0.1% gain after a 0.2% rise previously. The capacity utilization rate may edge up to 76.5%, which is where it finished 2019. After the markets close today, the Treasury's August International Capital flows report (TIC) will be released. Recall that in July, investors preferred short-term securities, and of the $126 bln of total net portfolio inflows, only $2 bln for long-term securities. 

Last week, Quarles's term as the Federal Reserve's Vice Chairman of Supervision ended, and he was not appointed to another term. His term as governor, however, does not expire until 2032. Many expect him to step down next year, after his term as the Chair of the Financial Stability Board ends this year.

A cohort of Democrats has been pushing Biden to replace Powell when his term ends early next year with Brainard. Brainard's is thought to be tougher on regulatory issues. The circle could be squared by Brainard replacing Quarles as Vice Chairman of Supervision, and re-appointing Powell as chair, which seems to be the underlying bias of the White House, according to press reports. In terms of the substance of policy, there has been remarkable continuity from Bernanke through Yellen and Powell. Brainard seems to be very much part of "tradition." 

Canada reports September housing starts (small decline expected), portfolio flows (net inflows slowing for in June and July), and the central bank's Q3 business survey results. The highlight for the week is Wednesday's September CPI report, where the headline may tick up, but the core measure may be stable, and Friday's August retail sales (strong gain after July's weakness). The implied yield of the June 2022 Banker Acceptances jumped 10 bp last week to almost 95 bp. It was the sixth consecutive weekly increase for a cumulative rise of 30 bp. The implied yield was up another 17.5 bp today at 1.13%. Mexico and Brazil have light economic calendars today.

The jump in short-term Canadian rates was not giving the loonie much support. It had risen to its best level since July before the weekend but was offered today. The greenback approached C AD1.2335 at the end of last week and was flirting with CAD1.24. The exchange rate settled below the five-day moving average consistently this month. It was found near CAD1.2410 today. A move and especially a close above it could spur a move toward CAD1.2450.

The Mexican peso rallied for the past four sessions, recouping about 2.5%, but stopped cold in its tracks by the risk-off sentiment that was evident today. The greenback approached MXN20.50, where a $550 mln option expires today. Above there, the MXN20.54 area corresponds to the (38.2%) retracement objective of last week's slide, and MXN20.61 was the next retracement (50%).

The dollar finished last week near BRL5.46. It was poised to trade higher, and there was a $670 mln option at BRL5.50 that expires today.

Jump In Rates Does Little For Sterling, Canadian And New Zealand Dollars

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Blake Morrow
Chart Of The Day : GBP/NZD By Blake Morrow - Dec 08, 2021

I expect GBP/NZD to drop to the .9271-1.9371 (we are pretty much there) and I am looking for a bounce. This could setup an inverted head-and-shoulder pattern if it does happen....

Jump In Rates Does Little For Sterling, Canadian And New Zealand Dollars

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