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The Weekly Close Out

Luke Suddards
Research Strategist
29 Oct 2021
Some very interesting moves as a result of RBA's action or lack thereof and failure to push back against hawkish rate pricing from the ECB. Let's take a look below.

Dollar Index (DXY):

The dollar has been bumbling about most of the week in a range, until the ECB meeting yesterday came and failed to pour cold water on hawkish rates pricing. Risk sentiment has been supported as most companies outperform their earnings’ expectations. Tesla’s moves have been crazy (gamma squeeze) catalysed by the Hertz 100k order. Peering back at last week’s net positioning data we see that net long positioning is still chunky and the weakness seen yesterday could be some of those positions being flushed out. I see this as a correction rather than the start of a new dollar bear trend. Shorter term bond auctions saw robust demand with the 2Y and 5Y maturities being bought without a hitch. Speaking of bonds something quite strange happened yesterday, the 30Y US bond yield dropped below that of the 20Y yield, prompting plenty chatter of recession etc. There are more technical factors at play in the bond markets such as positioning and investor preference for the 30-year maturity over the 20-year maturity, as a result I’d be hesitant trying to extract too much from that move. It is also month end so that could be having a distortionary effect on the dollar. Data wise Q3 US GDP disappointed coming in at 2% vs 2.7% expected. On the jobless claims front, both continuing and initial claims beat. The Fed’s preferred inflation metric just hit the wires and came in 10bps weaker than expected, but still at a punchy 3.6% YoY. Looking to next week we have the US Central Bank meeting on Wednesday (beginning of the tapering process very much priced in) and Non-Farm Payrolls due out on the Friday.


(Source: Pepperstone - Past performance is not indicative of future performance)

The dollar yo-yo'd a bit this week as price sold off yesterday coming down to the 50-day SMA and has now bounced off that level today back up to the 93.8 resistance. The RSI also used the 42 level as support and has turned around. Traders will be sitting on the sidelines until next week. Targets wise, to the upside I'd look towards 94 and on the downside the former range resistance and 50-day SMA at 93.2.


Well if Lagarde’s job was to push back against too hawkish rate pricing she did a terrible job. Initially, she said - Our analysis certainly does not support that the conditions of our forward guidance are satisfied at the time of lift-off as expected by markets, nor any time soon thereafter. Then a few mins later - It's not for me to say if markets are ahead of themselves. So a very half-hearted attempt to blunt market pricing. Additionally, she stated that the Governing Council discussed only three things today: Inflation, inflation & inflation - which provided enough ammo for traders to tighten rate bets further. The market now sees 20bps hike by October 2022, which seems actually laughable. It’s completely inconsistent with the ECB’s forward guidance as well as inflation forecasts (1.5% in 2023, 50bps off target). Also, the ECB’s preferred sequencing is to end asset purchases before looking at rate hikes. It’s very likely we’ll see a PEPP replacement post March 2022, which means that either they’d have to abruptly end asset purchases before October to hike rates and follow traditional sequencing or wholesale change their sequence. Based on this the market needs to cool its expectations. Inflation figures out from Germany yesterday were better than already fairly high expectations and the flash print today for the eurozone beat expectations too. The core print of 2.1% is a touch above the ECB’s target, however, it needs to remain there and be “durable”.


(Source: Pepperstone - Past performance is not indicative of future performance)

Euro had a good run yesterday and came right up to the 50-day SMA and 1.17 resistance level. Now, we're heading South again - eyeing the 1.16 level. Seems like those two levels are the new bounds for a range. The RSI is back below the key 52 level. Targets - 1.17 on the upside and 1.16-1.155 on the downside.


It was a fairly busy week for the pound in terms of news flow. We had the budget delivered on Wednesday. No surprises as much of it was leaked before Wednesday. Many commentators were saying that the budget was more akin to a budget by Gordon Brown than George Osbourne. I agree with that, I was disappointed there were no significant reforms to boost growth as well as pulling back on taxes. However, Sunak said is goal is to reduce taxes by the end of this parliament, so maybe we’ll see that planned corporate tax hike removed before the next election as well as some consumer tax support. So what were the key takeaways – 1) Total spending of £150bn during this parliament 2) Inflation averaging over 4% next year opposed to Bank of England saying it will only reach 4% 3) Growth forecast of 6.5% up from 4% for 2021 (return to pre-covid level by turn of year and fastest growth rate since 1973) - optimistic assumption, which other numbers in this budget depend on it coming true 4) Unemployment to peak at 5.2% 5) Economic scarring assumption revised down from 3% to 2%. Gilt yields dropped like a stone after the Debt Management Office (DMO) said it planned to issue £194.8 billion of bonds in 2021/22, £57.8 billion less than previously expected. Given that the budget was quite expansionary the bias for rates to drift higher rather than lower. A hike of 15bps is priced now for next week’s BoE meeting. I’ll be doing a preview for this event.

Brexit tensions are back! Beginning with fishing, France is not happy with the amount of vessels being granted licenses and have resorted to seizing a British vessel, threatening to cut off the electricity supply to Jersey as well as sanctions against the UK. The UK has said they will retaliate too if it escalates. I think Macron is trying to rally some patriotic support as he gears up for an election with candidates breathing down his neck. Secondly, on the issue of the NI Protocol, David Frost has stated that the EU’s proposals don’t go far enough and that the UK isn’t interested in any ECJ involvement in NI. Boris Johnson as a result has created a Article 16 committee to assess the ramifications of triggering Article 16 within the NI Protocol. For now traders’ focus is squarely on interest rate pricing, but if things do go nuclear between the two then a Brexit risk premium could be discounted by markets.


(Source: Pepperstone - Past performance is not indicative of future performance)

Cable is trapped in a tight range with next week's BoE meeting likely to be the catalyst to cause some price vol. The 21-day EMA has ever so slightly crossed above the 50-day SMA. The RSI as I noted previously struggled to sustainably remain above 60 as we have seen on previous rallies. Targets - 1.385 (horizontal resistance and 200-day SMA) on the upside. While on the downside, monitor a break of the 50-day SMA and 1.366 level.


BOJ kept its reputation as one of the most dovish banks on the bloc intact. Rates and asset purchases were left unchanged, while economic growth saw a downgrade. Short yen positions have built up substantially. I’m not surprised by this to be honest, the currency doesn’t have much working in its favour currently. They’re large energy importers and prices in this area haven’t eased as much as Japan would need. When volatility is low and market conditions benign the carry traders lick their lips and use JPY as a funding currency. The rollover of late is likely centred around the softer US 10-year yields we’ve seen throughout this week. Throw in some shorts being squeezed and needing to cover and you get USDJPY lower.


(Source: Pepperstone - Past performance is not indicative of future performance)

USDJPY continues to hold around the mid to high 113 levels. The RSI has found some support at the 58 level and has some room before worries of overbought creep in again. For now dips should be supported by the 21-day EMA and minor support around 113.2 area. Targets, on the upside monitor 114-114.5 and on the downside 113.2 and the 21-day EMA.


Have to mention the Aussie dollar after what we’ve seen this week in their 2-year yield. The RBA’s trimmed mean CPI reading came in quite a bit higher than expected which sparked a sell-off at the front end of the curve. This helped bring some bids into the Antipodean currency. Where things got really interesting was early Thursday morning with the market expecting the RBA to intervene as it has in the past to quell yield rises and bring it in line with their yield curve control target of 0.1%. Traders caught a massive wake up call as yields surged up to 50bps (5 standard deviation 1-day move). This in my opinion will only worsen the aggressive market pricing we’ve already seen in the Aussie short end of the curve and provide fodder to traders expecting the RBA to hike earlier than initially expected. However, this at the same time creates vulnerabilities for AUDUSD on too hawkish pricing being scaled back. Net positioning is still massively short AUD, so that would help with any squeezes higher if price took out some key upper levels. Iron ore continues to trade in the doldrums not offering any bullish support on the terms of trade front. Next week’s RBA meeting should be interesting to say the least.


(Source: Pepperstone - Past performance is not indicative of future performance)

Aussie dollar should be interesting as we approach next week's RBA meeting. Price currently is finding some resistance at the 200-day SMA, but given the dollar strength today it's held up well. The RSI is moving out of overbought. Targets to keep on your radar - 0.75785 (just above 200-day SMA and horizontal resistance). On the downside, 0.75 towards 0.742 (21-day EMA).


The yellow metal is struggling to get above the $1800 level. If price was to move past $1830 (where it struggled 3 times in the past) that would be a major bullish technical break. However, higher front end rates (2yr) could begin to hit gold on two fronts – stronger dollar and higher real rates. My view is that gold is not at the start of a new bullish cycle, how much lower can real rates really go from here, not much in my opinion. Therefore the bias if for real rates to move higher. ETF flows are also looking quite stretched at the moment. Real yields became more negative this week, but hasn’t fed through into bullish price action for gold. The big bearish candle today is on the back of dollar strength.


(Source: Pepperstone - Past performance is not indicative of future performance)

$1800 proved too much for gold and now price is approaching the key $1775 level around the 50-day SMA. The RSI has also slumped from the 60 region which played out on previous price rallies too. Targets to monitor - upside $1800, downside - $1775-50.


Clearly momentum is very strong in crude. The crude market’s pricing structure remains deeply backwardated, a bullish pattern (tight supplies). One has to wonder though if prices rose a bit too far and fast, however, this presents an opportunity to buy dips. Stagflation remains a real risk and its why crude price movements are on my radar. OPEC meeting on 4 Nov could be the catalyst to take Brent past $85 then $100 looks more realistic. Could Biden release some of the US’s reserves in the event of this to help the consumer? Gas-to-oil switching - Goldman forecast that the surge in gas prices could add at least 1 million barrels a day to oil demand. In that vein, Putin has instructed Gazprom to supply more gas given positive talks over Nordstream 2.


(Source: Pepperstone - Past performance is not indicative of future performance)

Price is sitting right on its 21-day EMA and support around $82.50 mark. The RSI has rolled over and back through the 58 level. Still think this is a candidate which will see dips bought. OPEC+ next week could get bulls going again next week. Targets wise, on the upside - $85 and on the downside - a break of $82.50 would open up $80.

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