CAPITALDIGEST, MARKET REVIEW, 27 SEPTEMBER 2021

MONDAY 20/9/2021 – SAFETY FLOWS EXTEND DOLLAR RALLY AHEAD OF FED Dollar banknote is seen in this illustration taken May 26, 2020. /Dado Ruvic/Illustration/File Photo By Tom Westbrook SINGAPORE The dollar began the week firmly on Monday with investors in a cautious mood ahead of several central bank meetings, headlined by the Federal Reserve, while looming catastrophe at indebted developer China Evergrande added to markets’ fragility. In thin trade, owing to holidays in Japan and China, the euro nursed losses from its weakest week in a month, slipping slightly to touch a four-week low of $1.1721. Sterling and the Australian and New Zealand dollars were also pressured toward new troughs. The kiwi, at $0.7024, and sterling, at $1.3722, made three-week lows as did the Aussie which fell 0.1% to $0.7253. [AUD/] “The U.S. dollar is having a bit of a rebound,” said Westpac analyst Imre Speizer, drawing support, he added, both from an expectation of imminent asset purchase reductions from the Fed and from caution as equity markets begin to get the wobbles. “Everyone is eying the Fed, waiting for a tapering signal.” The U.S. dollar index rose very slightly to a month-high 93.263. The yen held at 110.01 per dollar. The week brings central banks in Japan, the UK, Switzerland, Sweden, Norway, Indonesia, the Philippines, Taiwan, Brazil, South Africa, Turkey and Hungary as well as elections in Canada and Germany — though traders are mostly focused on the Fed.   TUESDAY 21/9/2021 – STERLING PINNED AT ONE-MONTH LOWS BEFORE CENTRAL BANK MEETING Sterling held near four-week lows on Tuesday as investors evaluated the direction the Bank of England would take at an upcoming policy meeting, while broader risk sentiment remained under pressure due to Chinese property company Evergrande’s debt troubles. In early London trading, the pound gained 0.2% to $1.3687, edging up marginally from previous day’s low of $1.364 – its weakest level since Aug. 23. Some analysts cited the next support for the pound at its August low of $1.3602. In an important week for monetary policy, the Federal Reserve and BoE are among a dozen central banks hosting their meetings, which kept major currencies confined to their well-trodden ranges. The overall market mood is cautious about potential economic repercussions from Evergrande’s debt problems. The pound was caught up in the sell-off across financial markets on Monday, while weak data tempering hawkish BoE expectations ahead of Thursday’s monetary policy meeting had added to the currency’s woes. Though no rate hikes are expected from the BoE until early 2022, investors had begun pricing in an end to the bank’s pandemic-era stimulus and sought commentary on policy tightening. “We believe that what’s currently priced in for the BoE is in general too optimistic,” said Esther Reichelt, foreign exchange and emerging markets analyst at Commerzbank. Sterling will not appreciate by much, she added, saying that the first rate hike in six-months “seems quite early given high uncertainties around the development of inflation and the pandemic, as well as possible Brexit fallout.”   WEDNESDAY 22/9/2021 – DOLLAR NEAR ONE-MONTH HIGH AS EVERGRANDE RISKS, FED LOOM The dollar held below a near one-month high on Wednesday as investors focused on two key risks — a default by Chinese property developer Evergrande and the expected pace of U.S. monetary policy tightening. The dollar index stood at 93.226 in early Asian trade, staying not far off Monday’s one-month high of 93.455. The euro changed hands at $1.1725, having stabilised at a one-month low of $1.1700 on Monday. The common currency dropped to a seven-month low of 127.93 yen, as the safe-haven Japanese currency was supported by the cautious mood. The dollar traded at 109.165 yen, near the low end of its trading range since mid-August. The Bank of Japan is expected to keep its policy on hold later in the day. “Due to worries about Evergrande, the market is still in risk-off mood, with both the dollar and the yen supported. My sense is the yen has been generally shorted by many players so there can be room for more short-covering,” said Tohru Sasaki, head of Japan markets research at JP Morgan. Evergrande, once China’s top-selling property developer, is inching closer to a key deadline on Thursday when the firm is due to pay $83.5 million in interest relating to its March 2022 bond.   THURSDAY 23/9/2021 – DOLLAR SLUMPS AS RISK APPETITE REBOUNDS The dollar fell across the board on Thursday as improved risk sentiment in global financial markets wiped out its gains in the previous session after the U.S. Federal Reserve flagged plans to dial back its stimulus this year. Investors’ risk appetite improved after Beijing injected fresh cash into its financial system ahead of an $83.5 million bond coupon by embattled property giant Evergrande, at risk of becoming one of the world’s largest-ever corporate defaults. Worries about Evergrande’s payment obligations and what systemic risks to China’s financial system the property giant’s difficulties pose have weighed on global financial risk sentiment in recent sessions. “Commodity currencies are broadly higher while havens are weaker, leaving the USD trading generally lower after a firm close following the FOMC (Federal Open Market Committee),” Shaun Osborne, chief currency strategist at Scotiabank, said in a note. The U.S. Dollar Currency Index, which measures the greenback against a basket of six rivals, was 0.5% lower at 93.037. The index, which had risen 0.25% on Wednesday, was on pace for its biggest daily percentage drop in a month but remains close to the near 10-month high touched in late August. The offshore Chinese yuan strengthened versus the greenback at 6.4599 per dollar.   FRIDAY 24/9/2021 – STERLING DIPS AFTER RALLY TRIGGERED BY HAWKISH BOE Sterling dipped against the dollar on Friday, losing some of its gains from a rally which followed the Bank of England taking a hawkish tone on interest rates and its pandemic-era government bond buying scheme. Markets brought forward their expectations of an interest rate rise after the central bank lifted on Thursday its forecast for inflation and two of its policymakers called for an immediate halt to its 895 billion-pound ($1.23 trillion) bond purchase programme. “A first-rate step in Q1 is now priced in by financial markets which is likely to provide support for sterling for now,” wrote Commerzbank analyst Esther Reichelt, adding however that the Britain’s economic recovery raised questions moving forward. “To be quite clear: we consider the current GBP strength to be justified, but continued challenges for economic growth such as the labour shortages that have been aggravated by Brexit are likely to prevent a rapid tightening of monetary policy,” she added. The pound, which had risen as high as $1.375 during the previous session, retreated to about $1.371 by 0830 GMT. The currency was trading around $1.368 before the BoE announcement.