Weekly market update 21 November – Dollar continued its climb, RBNZ’s monetary policy meeting in focus this week

Weekly market update 21 November – Dollar continued its climb, RBNZ’s monetary policy meeting in focus this week

1. The Dollar extended its rally, reaching levels not seen since July 2020 as traders anticipate earlier Fed rate hikes to rein in inflation. Money markets are currently expecting a hike in June 2022, along with two further hikes in September and December 2022. The Dollar could edge higher as risk aversion seen in the markets, triggered by concerns over the virus resurgence and new lockdown measures continue to buoy demand for the safe-haven asset. On the data front, US Retail Sales rose by 1.7% MoM in October and exceeded 1.2% growth estimates and the 0.8% MoM gain in September. Core Retail Sales rose by 1.7% in October, above 1.0% growth estimates and September’s 0.7% MoM increase. In the coming week, investors will turn their attention to the FOMC minutes released on Wednesday for further insights on the next steps by the Fed, following its plans to scale back on the monthly bond purchases as the economy and labor market continue to recover. That said, Fed Chair Jerome Powell was adamant on maintaining the current interest rates level as the economy has yet to reach maximum employment level. Elsewhere, President Biden is expected to make a Federal reserve chair announcement soon, with either Fed Chairman Jerome Powell or Fed Governor Lael Brainard as potential candidates. Markets could price in a more dovish Fed with slower rate hikes in the coming years, limiting the Dollar’s upside if Fed Governor Lael Brainard is nominated. On the economic calendar, notable publications include the  flash Markit PMIs, Michigan consumer sentiment and second estimate of third-quarter GDP, which should reflect slower economic growth between the July to September period, amid persistent supply bottlenecks and rising inflation.

2. Across the Atlantic, Euro reached a fresh low since July 2020 as a dovish ECB and the virus resurgence dragged the currency lower. ECB President Lagarde continued to push back against expectations of policy tightening in the Eurozone, a stark contrast to some of the major central banks who are preparing to withdraw their stimulus with signals of earlier rate hikes. Meanwhile, Europe grapples with a rising number of infections with Austria announcing a full lockdown while Germany Greece and the Netherlands tightened restrictions. In the coming week, traders will keep a close watch on the Eurozone flash consumer confidence, Germany final reading of third-quarter GDP growth, Gfk consumer survey and Ifo business survey for further insights on the Eurozone’s economy. Elsewhere, Sterling pared earlier week’s gains amid a stronger Dollar, as the highest surge in US inflation in three decades stoked market wagers of earlier Fed rate hikes. On the data front, retail sales for October rose by 0.8% in October 2021, reflecting a pickup in consumer spending and adding further prospects for the Bank of England to raise interest rates next month. On the economic calendar, flash Markit PMIs will take the spotlight, with numbers reflecting a slowdown in UK private sector business activity in November.

3. The Australian Dollar extended its decline against the greenback on the back of a dovish RBA. In the latest policy meeting minutes, the RBA indicated that it is prepared to be patient until wage and inflation targets are met, with the 2024 rate hike still its central case. On the data front, Australian wages posted a 2.2% increase YoY in the third quarter, in line with market estimates but shy of the pace that would warrant an interest rate hike. Elsewhere, the New Zealand dollar steadied against the greenback on the back of a hawkish RBNZ, as traders anticipate another interest rate hike amid a decade-high inflation and record low unemployment. The central bank is widely expected to hike rates by at least 25 basis points in its 24 Nov policy meeting, with further rate hikes as the country recovers from the pandemic. Gold pared recent gains on the back of a stronger Dollar as traders bet on earlier rate hikes, which increased the cost of holding the precious metal in foreign currencies. That said, the downside in gold is limited as it is often seen as a hedge against inflation as well.

Salzworth Asset Management