Daily Market Outlook, November 4, 2021

Overnight Headlines

Fed Confirms Plans To Begin Tapering Asset Purchase This Month
Powell: Fed Patient On Hikes, Can Act On Inflation If Needed
House Democrats Could Finish Votes On Biden Bills On Friday
Lagarde: The ECB Is Very Unlikely To Hike Rates Next Year
Economists Split Over Whether BoE Will Raise Bank Rate Today
Portugal's President To Dissolve Parliament; Snap Election Looms
China Fortifies Beijing As Covid-19 Outbreaks Continue To Swell
Japanese Service Activity Grows For First Time During Pandemic
Australian Retail Sales Fall 4.4% (est -5.0%) As Lockdowns Bite
Oil Prices Extend Decline After Iran Sets Date For Nuclear Talks
China Stocks Rise On Consumer Staples Boost; Hong Kong Gains
China Developer Bond Slump Deepens, Selling Spreads Onshore

The Day Ahead

Asian equity markets are mostly higher following last night’s US Fed policy update. The Fed confirmed that it will start to run down (‘taper’) its asset purchase programme from this month. The initial monthly reduction from the current rate of $120bn purchases per month would be $15bn. Assuming similar-sized cuts in subsequent months, it leaves the Fed on track to complete the tapering process at about the middle of next year. The positive market tone likely reflects indications that the Fed seems in no great hurry to lift interest rates.

Speculation is rampant that the Bank of England will hike interest rates today, with markets already discounting a 15bps increase to 0.25%. Expectations have been fuelled in large part by hawkish comments from Governor Bailey and Chief Economist Pill that some action is likely required in response to the ongoing rise in inflationary pressures. Although others on the MPC have also said that they are not ready to vote for a hike at this time, this has not been enough to cool expectations. There is arguably a good case for waiting for more data, including developments after the ending of the furlough scheme. What might be crucial, however, is that most BoE policymakers may calculate that an early move may potentially help to stabilise inflation expectations and mean that less action will be required later. So, while the decision is finely balanced, expect a 0.15% hike. Support for this, however, is unlikely to be unanimous and it will be interesting to see how wide the spilt is and understand the main arguments on both sides. The BoE will also need to signal and explain what it expects to happen next. Markets are currently discounting several more rate rises over the next 12 months, taking Bank Rate to 1.25% by end-2022. While some further action may be necessary, it appears that market expectations are probably excessive at this time. Past comments from the MPC would suggest that they share this view and so may want to signal that to markets. However, they will want to ensure a firm grip on inflation expectations and so will probably want to stress that upside inflation risks point to the need for further action. The message that rates are likely to rise further, but probably not by as much as markets expect, may not be easy to convey at a time of such heightened market expectations and so there is a risk of confusion. Certainly, the details of the BoE’s latest forecasts in its Monetary Policy Report will need to be followed closely.

Market risk sentiment improved, as the US yield curve steepened following the Fed decision. The 10-year Treasury yield climbed to around 1.60%, while the rise in shorter dated yields was more limited. In currency markets, GBP/USD fell back after a temporary rise to 1.37. Brent crude oil fell below $82 a barrel ahead of today’s OPEC+ meeting.

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: 1.1525 (1.1BLN), 1.1550 (1.1BLN), 1.1575 (421M), 1.1600 (517M)

1.1625 (473M), 1.1650 (469M)

GBP/USD: 1.3600-20 (434M), 1.3825 (460M)

EUR/GBP: 0.8520-25 (820M). EUR/NOK: 9.9100 (510M)

AUD/USD: 0.7400-15 (429M), 0.7430 (288M), 0.7450-55 (348M), 0.7500 (797M)

USD/CAD: 1.2420 (790M)

USD/JPY: 113.70 (390M), 114.00 (2.1BLN), 114.30 (1.8BLN), 114.50 (733M)

115.00 (1BLN)

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.