CAPITALDIGEST MARKET REVIEW. 25TH OCTOBER 2021

MONDAY 18/10/2021 – STERLING STEADIES NEAR 20-MONTH HIGH VS EURO ON BAILEY’S FRESH RATE HIKE SIGNALS Sterling steadied near a 20-month high versus the euro on Monday after Bank of England Governor Andrew Bailey sent a fresh signal that the central bank is gearing up to raise interest rates as inflation risks mount. Sterling has gained 5.5% versus the euro this year, with analysts pointing to expectations the BoE will raise rates as a major factor supporting the pound, while the British economy has struggled with a shortage of labour, an energy crisis and rising COVID-19 cases. During an online panel discussion on Sunday organised by the Group of 30 consultative group, Bailey said the BoE will “have to act” in its monetary policy meetings on the risk of medium-term inflation. He continued to believe that the recent jump in inflation would be temporary, but that a surge in energy prices would push it higher and make its climb last longer. On the expectations of rate hikes, 2-year British government bond yields jumped by 16 basis points to their highest level of 0.751% since May 2019. Overnight, sterling surged again to its highest of 84.25 pence versus the euro since February 2020. By 1450 GMT, it lost some steam, trading 0.1% lower at 84.54 pence.   TUESDAY 19/10/2021 – DOLLAR DIPS AS BONDS STABILIZE, WHILE STERLING, NZ DOLLAR GAIN The dollar pared losses on Tuesday as Treasury yields climbed but remained lower on the day as other currencies, including sterling, were boosted by expectations of sooner-than-previously expected interest rate hikes. The greenback reached a one-year high against a basket of other currencies last week as Treasury yields surged and as investors bet the Federal Reserve may need to increase rates to address stubbornly high inflation. Yields appeared to stabilize on Tuesday, before grinding higher again, with benchmark 10-year yields reaching more than three-month highs. The dollar’s move lower on Tuesday was likely exaggerated by technical factors as investors unloaded long positions. “The movement in rates hardly explains the extent of the USD drop,” analysts at Scotiabank said in a report. “Rather, it seems USD long liquidation has snowballed into a broader clear out of positioning, triggering a technical reversal in the USD generally,” they said. The dollar also dipped after data showed that U.S. homebuilding unexpectedly fell in September and permits dropped to a one-year low amid acute shortages of raw materials and labor, supporting expectations that economic growth slowed sharply in the third quarter.   WEDNESDAY 20/10/2021 – DOLLAR DIPS AS RISK SENTIMENT IMPROVES, BITCOIN HITS RECORD HIGH The dollar dipped on Wednesday as risk sentiment improved and as investors focused on rising commodity prices and when global central banks are likely to begin hiking interest rates to fend off persistently high inflation. The greenback hit a one-year high against a basket of other currencies last week as market participants ramped up bets that the Federal Reserve will raise rates sooner than expected to quell rising price pressures. Those bets have faded, however, while investors are pricing for even more aggressive rate increases in other countries and as commodity-linked currencies including the Canadian and Australian dollars outperform. “When it comes to central banks, there’s a lot of aggressive pricing out there,” said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto, noting that the market is likely overstating how quickly rate hikes will come. The dollar index fell 0.24% to 93.57. Rai expects the dollar may outperform if investors pare back rate hike expectations in other countries, though “that’s something that’s going to take some time to correct.” “When push comes to shove, given the underlying fundamentals in the United States, which are still very constructive for growth, we think the Fed is probably going to be the central bank that raises rates over the course of the coming years at a bit of a more aggressive clip than the market is pricing in now,” Rai said.   THURSDAY 21/10/2021 – STERLING FALLS FROM ONE-MONTH HIGHS AS RISK CURRENCIES’ RALLY COOLS Sterling dipped below one-month highs on Thursday, tracking a similar move in risk-oriented currencies as sentiment weakened across financial markets and traders sought refuge in the safer dollar and yen. The pound has risen about 3% against the dollar since late September, on the back of expectations of an imminent interest rate hike by the Bank of England. “BoE tightening expectations have surged, with the first hike now fully priced for the November 4th (BoE) meeting”, ING analysts said in a note. A dip in September inflation is seen unlikely to stop the Bank of England from raising interest rates soon, with many executives warning about fast-rising prices during their third-quarter earnings presentations. “We expect inflation to be higher next year than this year,” Graeme Pitkethly, finance chief at consumer goods giant Unilever told investors on Thursday. At 1430 GMT, the pound was down 0.06%, at $1.3815 just slightly below a one-month high of $1.3834 reached on Tuesday. Against the euro, the pound was flat at 84.25 pence . While there is a strong consensus about the BoE being the first major central bank to raise interest rates in the post-pandemic cycle, a poll of economists by Reuters showed the first hike could come only early next year, later than markets are pricing in.   FRIDAY 22/10/2021 – FOREX-DOLLAR SET FOR SECOND WEEK OF DECLINES BUT OUTLOOK BULLISH The U.S. dollar slipped against its rivals on Friday and is set for a second consecutive week of decline as news that heavily-indebted property firm China Evergrande Group had averted a default buoyed appetite for risky assets. Concerns over the embattled property developer whose liabilities are equal to 2% of China’s gross domestic product had sent investors flocking to the perceived safe-haven currencies like the U.S. dollar and government debt. Worries of economic contagion have seen swathes of other heavily-indebted developers hit with credit rating downgrades. But days before a deadline that would have plunged the embattled developer into formal default and sent shockwaves through global markets, the company had supplied funds to pay interest on a U.S. dollar bond. “So while this is good news in terms of a formal imminent default being avoided over the weekend, uncertainty is set to remain high until there is further clarity on Evergrande’s position and the position of other property companies in China,” MUFG strategists said in a daily note. The dollar index edged 0.1% lower to 93.61, putting it on track for a second straight week of falls. But the broader market narrative remained supportive of more U.S. dollar gains as rising bond yields on the back of firmer inflation expectations are expected to lend support to the greenback.