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U.S.-EU Rapprochement, Can France And The UK Do The Same?

By Marc ChandlerForexNov 01, 2021 06:41AM ET
U.S.-EU Rapprochement, Can France And The UK Do The Same?
By Marc Chandler   |  Nov 01, 2021 06:41AM ET
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It was mostly a quiet start to the new month. Most of Europe was closed for the All -Saints holiday and the week's key events start tomorrow with the Reserve Bank of Australia meeting.

News that the Liberal Democrats retained a majority in the lower chamber of the Diet helped lift Japanese indices by 2%. Most of the large regional markets gained, though China and Hong Kong markets fell. US index futures were trading with a higher bias after eking out minor gains ahead of the weekend.

The 10-year US Treasury yield was up a couple of basis points to 1.57%. Australian and New Zealand yields pared the pre-weekend surge. Australia's 10-year yield was off 16 bp, and the two-year yield was down 6 bp. New Zealand rates eased five and four basis points, respectively, for the 10-year and 2-year yields.

The dollar was a little firmer against most currencies. The yen andAustralian dollar were off 0.3%-0.4%, whereas most other majors were off less than 0.1%. Emerging market currencies were also mostly lower. The Turkish lira was trading higher, and ahead of this week's central bank meeting, the Czech koruna was posting small gains. The Polish zloty gave back its initial gains. The markets were less sure that the Polish central bank will hike this week.

Gold was consolidating in the middle of last Friday's range. Key support was seen near $1770. December WTI was hovering around $84, and copper was heavy but holding near last week's lows when it lost almost 3%.

Asia Pacific

The Liberal Democratic Party in Japan lost about 15 seats but held on to its majority in the lower chamber of parliament. Irs coalition partner, Komeito gained three seats. Together the coalition has 293 of the 465 seats, according to reports. The issue now is the implication of the narrower majority. Some suggest the risk of a series of short-lived governments as Japan experienced previously. We suspect a cabinet reshuffle and, if anything, a larger fiscal stimulus. Separately, the October manufacturing PMI rose to 53.2 from the 53.0 initial estimate. This was the highest since March. September stood at 51.5.

China's official PMI disappointed. The manufacturing PMI eased to 49.2 from 49.6. Power shortages and rising commodity prices weighed on activity and limited the holiday speaking. Output fell to 48.4 (from 49.5), the lowest outside of the initial COVID weakness. Seasonal factors did not help. The Caixin manufacturing PMI was slightly better than expected at 50.6, up from 50.0. The official service PMI eased to 52.4 from 53.2. The composite fell to 50.8 from 51.7. Today's report will encourage economists to revise down Q4 growth forecasts. The weaker PMI has rekindled speculation that the PBOC may cut reserve requirements.

The Reserve Bank of Australia meeting concludes first thing tomorrow in Canberra. The lack of much official guidance after not defending its yield curve control unsettled the debt markets last week. Although yields fell today, the wider spread between bid and offer showed that activity had not normalized. The swaps market was pricing in about 80 bp of tightening over the next 12 months. The issue was the extent that the RBA capitulates to the market. Until now,  Governor Lowe has argued that the key was wages, and he does not see the conditions for a rate hike until 2024.

After rising about a third of a yen before the weekend, the dollar was up another third of a yen today, to around JPY114.45. The four-year high was set on Oct. 20 near JPY114.70. Since breaking higher, the upper end of the new range was not clear. We suspect it was the JPY114.50-JPY115.00 area, at least initially.

The Australian dollar drifted lower. Thus far, last week's low near $0.7480 remained intact. An option struck there for A$433 mln expires today. It may require a break of the $0.7455 area to confirm a top was in place.

The PBOC set the dollar's reference rate at CNY6.4192 compared to the median expectation (Bloomberg) for CNY6.4181. Recall that the greenback rose about 0.22% against the yuan before the weekend, the largest advance since early August. It gave nearly half back today and was unable to sustain the move above CNY6.40.


On the sidelines of the G20 meeting, the US and Europe reached a deal on the controversial tariffs on steel and aluminum that were imposed on national security grounds. It was important to get an agreement by Dec. 1 when the EU would double its retaliatory tariffs. The grounds of the compromise have been floated for some time. It was a combination of quota and tariff. EU steel and aluminum exports to the US below a specific limit would not face the extra tariff, and the shipments above it would have the 25% levy. The particular threshold would be announced later. The deal was only between the US and EU. Other countries, like the UK, will have to strike a separate agreement.

Although France and the UK say they want to de-escalate the fishing row, it is not clear that they will manage to do so. The UK claimed that 98% of the fishing license applications have been granted. The French said it is only 90%, and nearly all the rejected applications were for French boats. If this is not rectified by tomorrow, France has threatened to tighten restrictions on goods crossing the Channel and prevent British boats from unloading the catches as they do in France. The UK said France has to move first.

Germany reported dismal September retail sales. Economists surveyed by Bloomberg had a median forecast for 0.4% after a 1.2% gain in August. Instead, retail sales tumbled 2.5% and brought the year-over-year pace back below zero. The German government and the Bundesbank recently revised this year's GDP projections down. Separately, the UK's manufacturing PMI edged up to 57.8 from the flash reading of 57.7. It was the first gain since May and stood at 57.1 in September.

The euro dropped a little more than 1% before the weekend, its largest decline since mid-June. The low was about $1.1535, just above the low for the year recorded on Oct. 12, near $1.1525. It steadied today was not above $1.1575. Previous support around $1.1585 was now likely to be resistance. Also, the five and 20-day moving averages were converging near $1.1600. On the downside, we have noted that the $1.1490 area corresponded to the (50%) retracement of the rally that began in March 2020 and peaked, ironically, on Jan. 6, amid the chaos in Washington.

Sterling shed a cent at the end of last week, but unlike the euro, it continued to fall today. It eased another quarter of a cent today, and the session's low may not be in place. At $1.3625, sterling would have retraced half of its rally from the late September low (~$1.3410). The next retracement (61.8%) was closer to $1.3575. The BOE meets on Nov. 4, and many expected a rate hike. While we recognize the possibility, we suspect that the risk is that it completes its bond purchases and waits a little longer to hike rates. As an aside, note that European clocks were setback an hour this past weekend, while US daylight savings time ends next weekend.


This week's focus is on the FOMC meeting, where the long-awaited tapering announcement is anticipated. The extent of the hawkish message, though, may be revealed more in how it characterizes inflation. Since April, it has been saying prices have been elevated by transitory factors. Many expect it will be dropped in the statement after the meeting on Nov. 3. Also, the pace of the tapering is important because only when it is over will the Fed hike rates. Chair Powell has said it would be completed around the middle of the year. The Fed funds futures suggested the market sees the risk of no gap between finishing the purchases in June and delivering the first hike then as well.

The US sees the final manufacturing PMI today. Recall that the preliminary reading showed the third consecutive decline (59.2 vs. 60.7). The manufacturing ISM will be reported as well. It has held up better than the PMI, but it is expected to have slipped to 60.5 in October from 61.1. Its price component is expected to make a new high (82.0 vs. 81.2).

With Q3 GDP already out, September construction spending will likely be glossed over. Canada gets its manufacturing PMI. It was at 57.0 in September. While the economy appeared to have emerged from the soft patch, supply chain disruptions continued to make for an uneven recovery. In any event, the focus was on the more hawkish signals from the Bank of Canada that unexpectedly ended its bond-buying and signaled the possibility of an earlier rate hike.

Mexico reports September work remittances. This is an important source of capital inflows in Mexico. They averaged $4.1 bln a month this year through August. In a similar period last year, the average was $3.3 bln, and in the first eight months of 2019, they averaged $3 bln. Brazil gets its manufacturing PMI but also October trade figures. Brazil's trade surplus is one of the country's bright spots. It has averaged $6.27 bln a month after $4.55 bln for the same period last year and $3.01 bln in Jan-Sept 2019.

When the Bank of Canada surprised the market last week, the US dollar traded in a broad range of roughly CAD1.2300 to CAD1.2435. It remained in that range since then. Rising equities, a wider Canadian premium, and elevated oil prices support the Loonie. Continued consolidation appeared to be the most likely near-term scenario. Still, the risk seemed to be the US dollar's upside given the broader context and the momentum indicators that have turned higher.

Mexico's economy unexpectedly contracted in Q4, we learned before the weekend. The dramatic adjustment to the rate outlook in the Anglo-American economies, especially the US, weighed on emerging market currencies and the peso. The dollar rose 1.9% against the peso last week and was up another 0.5% today, its fourth consecutive advancing session. A move above the MXN20.72 level would target last month's high slightly above MXN20.90.

U.S.-EU Rapprochement, Can France And The UK Do The Same?

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U.S.-EU Rapprochement, Can France And The UK Do The Same?

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