Daily Market Outlook, November 3, 2021

Overnight Headlines

US Spending Bill Shows Progress In House; Sticking Points Remain
Manchin Outlines Concerns Over Biden Agenda; Says Deal Possible
Biden Administration Will Announce Fed Chair Pick Fairly Quickly
Republican Youngkin Takes Virginia Election In A Blow To Biden
Belgium PM De Croo: Europe's Green Strategy Is A Trade Weapon
UK PM Plays Down Rift With France Over Brexit Fishing Licenses
China Boosts Cash Injection Amid Maturity Wall, Economic Risks
China's October Services Activity Expands At Faster Clip: Caixin
China's Latest Covid Outbreak Its Most Widespread Since Wuhan
Japan Looks To Resume Issuing Long-Term Business Visas: Nikkei
New Zealand Jobless Rate Falls To 14-Year Low As Hiring Surges
Australian Dollar Upset By Dovish RBA, Kiwi Gets Jobs Cheer
Oil Prices Fall As Industry Data Shows Big Build In US Inventory
Chinese Stocks Fall After Premier Warns Economy Faces Pressure

The Day Ahead

Asian equity markets are mostly lower this morning and European and US equity futures are also down as markets wait for today’s US Federal Reserve announcement. In China, the unofficial Caixin PMI services index unexpectedly rose to a three-month high in October.

Today’s US Federal Reserve briefing is the first of two highly important monetary policy updates over the next couple of days. In his last comments before the Fed started its pre-meeting purdah period, Fed Chair Powell said that now was the time to start tapering asset purchases and so a formal announcement today seems inevitable.

Less certain is the path of tapering. Until recently it was generally assumed that the Fed would announce an initial reduction of $15bn to its $120bn monthly programme. With similar sized reductions in the subsequent months, that would end the process around mid-2022. However, more recently some Fed policymakers have said that they favour a faster rate of reduction. If the Fed does opt for a quicker pace of tapering, or even indicate that the pace may pick up later, this will be seen as a more-hawkish signal that it is potentially readying itself for an earlier than previously indicated rise in interest rates.

Aside from this possible signal, the Fed is unlikely to provide much new guidance on interest rates. In his pre-blackout comments, Powell also said that he was not yet ready to start discussing rate increases. That suggests that while today’s policy statement and Powell’s press conference will stress remaining vigilant regarding the rise in inflation and the need to act if necessary, the Fed will not go further at this point. Indeed, Powell is likely to repeat that the bulk of the current rise in inflation is “transitory” and that the ‘bar’ in terms of the evidence they want to see to justify a rate hike is much higher than it was for tapering asset purchases. So now seems likely to maintain a less hawkish policy stance than that taken by a number of other central banks including probably the Bank of England tomorrow.

Today’s data calendar will probably be overshadowed by the Fed update. The October PMI services reports for the UK and the Eurozone are second estimates that are not expected to be revised. However, the US October ISM services report is new data. It may slip from September’s level reflecting ongoing supply side constraints including recruitment issues but will probably still be at a high level.

Longer dated US and UK bond yields are both slightly lower ahead of today’s announcement. Meanwhile, in currency markets the US dollar is close to recent highs against both the euro and sterling. The pound has edged up marginally against the euro overnight but is still below last week’s level despite expectations that the Bank of England will hike interest rates tomorrow.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1550 (494M), 1.1585-1.1600 (1.1BLN), 1.1625 (364M)

1.1650-55 (565M)

GBP/USD: 1.3550 (544M), 1.3615 (821M), 1.3650 (700M)

EUR/GBP: 0.8400 (400M), 0.7465 (440M)

AUD/USD: 0.7350 (742M), 0.7425 (228M), 0.7445-50 (267M), 0.7525 (400M)

USD/CAD: 1.2350 (420M), 1.2425 (293M), 1.2450 (920M), 1.2555 (450M)

USD/JPY: 113.50-55 (350M), 113.75 (750M), 114.00 (485M), 114.30 (580M)

USD/SEK: 8.5800 (800M)

This week's larger FX option strike expiries

The hedging of FX option strikes can influence FX price action if nearby, and more so when the strikes are large and soon to expire, so it's worth being armed with this information in advance.

There's nothing substantial in USD/JPY until the wake of the U.S. Federal Reserve policy announcement on Thursday – $1.2-billion 113.00, $1.7-billion 114.00, $1.5-billion 114.30, $1-billion 115.00, and $850-million strikes at 115.30. Friday has $1.2-billion at 113.70, $600-million at 114.25, and $841-million at 115.00.

The biggest EUR/USD strike is Tuesday at 1.1585 on 1.6-billion euros, with 810-million at 116.45, and 1.2-billion euros at 1.1495-1.1500. Wednesday has 900-million euros between 1.1585-1.1600. Thursday has 600-million euros at 1.1500, 1-billion 1.1515-25, and 685-million euros at 1.1550. Friday has 800-million euros between 1.1560-75.

GBP/USD's biggest strikes are on Wednesday – 544-million pounds at 1.3550. 571-million at 1.3615 and 476-million pounds at 1.3650. Thursday has 460-million pounds at 1.3825. EUR/GBP has 581-million euros at 0.8440 and 440-million at 0.8525 Tuesday. Wednesday has 400-million at 0.8400, and 440-million at 0.8465. Thursday has 780-million euros at 0.8520-25, and Friday has 1-billion euros at 0.8440, and 444-million euros at 0.8550.

The biggest AUD/USD strikes are Wednesday at 0.7350 on A$742-million, Thursday at 0.7500 on A$694-million, and Friday at 0.7500 on A$465-million. USD/CAD has $747-million at 1.2350 Monday .... Wednesday has $900-million at 1.2450. Thursday at 1.2420 on $500-million, and $1.2-billion between 1.2555-75. There are $700-million between 1.2375-1.2400 Friday, along with $760-million 1.2500-05.

1.5-billion euros of a EUR/SEK strikes at 10.27 look unlikely to come in to play on Wednesday, but look out for $800-million USD/SEK at 8.5800 that day.