Dollar rallies as monetary tightening comes into focus

The dollar's blistering rally gathered speed last week as markets brought forward their expectations for Fed hikes, while the European Central Bank's aggressively dovish communications hammered the euro.

Central bank policy has become the main driver in currency markets, and other news are typically ignored except insofar as they affect expectations for future rate hikes. Special mention to the pound, which held off better than most, ending the week almost flat versus the US dollar, and the Turkish lira, which was by the far the worst performing currency as President Erdogan forces its central bank to cut rates in the face of near panic

selling of the currency by locals.

Although the Thanksgiving holiday in the US usually makes for sluggish trading, this year may mark an exception. The US Treasury will sell an unusually large amount of bonds in auction, and it is not clear the nervous fixed income market will absorb this massive supply with ease after the recent sell-off in bonds and hawkish noise from Federal Reserve officials. President Biden is expected to announce his pick for Federal Reserve chair before the holiday, and on Wednesday the PCE inflation report is released.

The Eurozone indices of business activity for November are released on Tuesday, and will be the first read of the impact of recent COVID news on business confidence. The news-packed week, combined with the lower liquidity associated with the US holiday, could make for some serious volatility.


Sterling managed to eke out a flat week versus the US dollar, which means it rallied against the rest of its G10 peers and almost every other major currency worldwide. Positive news from UK retail sales and the labour market anchored expectations for a move up in rates before the end of 2021, which stands in sharp contrast with ECB ultra-dovishness. Employment actually increased in October in the first full month following the end of the furlough scheme, supporting our view that the fallout from the end of the programme is likely to be limited.

PMI reports and speeches from Bank of England's MPC members this week should underpin such expectations, and we are becoming quite positive on the prospects for the pound between now and the end of the year.


The euro continues to plummet on both ECB pushback against rate hike expectations and negativity around yet another round of COVID lockdowns. A handful of countries in the bloc have imposed fresh restrictions, notably in Austria that has announced a full nationwide lockdown lasting a maximum of 20 days.

The PMI releases this week will capture some of the impact on business confidence, and so will be closely watched by markets. Newsflow has not been kind to the common currency, but after the brutal sell-off of the past few weeks it looks somewhat oversold and may find a floor if ECB speakers this week do not sound overly alarmed by the COVID situation.


Federal Reserve officials made some hawkish noises late Friday, suggesting that the pace of the taper may accelerate and signalling that the FOMC is increasingly alarmed by inflation data.

In addition to the PCE inflation data on Wednesday, right before the holiday, the auctions of Treasury bonds on Monday and Tuesday will be key to gauge market appetite for further US debt in a context of massive supply, diminished Fed support and massively negative real rates. The minutes for the last meeting of the Federal Reserve and Biden's decision on the next chair of the Federal Reserve, where he is expected to pick either current chair Powell or an even more dovish candidate, Brainard, will round out an unusually packed calendar

right before the Thanksgiving holiday.


The Swiss franc ended last week higher against the euro, with the EUR/CHF pair dropping below 1.05 for the first time since 2015. The bulk of the move took place on Friday and was induced by fears surrounding lockdowns in Europe. The franc has also recently underperformed its fellow safe haven currencies, which can be attributed to differences in the pandemic situation: infections in Switzerland are rapidly increasing and the number of new cases is now at its highest level in around a year.

Aside from the usual sets of data such as positioning and SNB sight deposits, we’ll focus on the third-quarter GDP growth print set for release on Friday. While it is unlikely to rock the boat, it could give the Swiss National Bank additional information needed to assess how forcefully it should react to the strengthening of the currency.


The Australian dollar ended last week below 0.73 against the US dollar, as the Reserve Bank of Australia once again pushed back against bets of rate hikes in 2022. The minutes of the RBA’s November Monetary Policy Meeting published last Tuesday repeated previous statements by the central bank that it is prepared to be patient until wage and inflation targets are met, and that a 2024 rate hike continues to be its central case, even if inflation outlook is more uncertain than it has been for a long time. RBA governor Philip Lowe also said that current data and forecasts do not warrant an increase in the interest rate in 2022.

The RBA’s minutes also showed that a rebound in domestic demand in Australia was forecast for Q4 2021 and Q1 2022 as restrictions are further eased and vaccinations accelerate. GDP is now forecast to grow by around 3% in 2021, 5% in 2022, and 2% in 2023.

On Monday, the November preliminary PMIs will be published, followed by the publication of October retail sales on Friday.


The Canadian dollar weakened and ended last week trading around the 1.265 level versus the US dollar. The move lower in the currency can be partly attributed to a drop in global oil prices. Brent crude futures fell below $77 a barrel, a level not seen in six weeks, marking a fourth consecutive week of declines.

Canada’s headline inflation rate rose to 4.7% in October, from 4.4% in the prior month. This was in line with market expectations and was the highest inflation rate since February 2003. Prices rose in all eight major components, with the greatest pressure coming from transportation (10.1% versus 9.1% in September), the steepest increase since March 2003, supported by energy costs (25.5%). This will no doubt heap additional pressure on the Bank of Canada to tighten policy sooner rather than later, with markets now pricing in the first hike at the bank’s January meeting.

This week will be mostly quiet in terms of economic data releases, so CAD may be driven by events elsewhere.


Contrary to many EM currencies, CNY held its own last week, ending little changed against the US dollar. In fact, the RMB CFETS index continued to march higher: last week the yuan rose to the strongest position since 2015 against its major peers.

Last week’s Biden-Xi meeting did not yield any breakthroughs, although high-level contact is a positive sign given increasing tensions between the two countries in recent years. Meanwhile, China’s loan prime rate was left unchanged today, as expected, although investors were much more interested in the PBoC’s comments on the yuan. Authorities acknowledged the recent rally in CNY during its communications, explicitly warning

financial institutions from making one-way bets on the currency. This marks a rare verbal intervention in the market from policymakers, making the relative stability in the yuan since the announcement somewhat surprising.

While we think that the appreciation of the yuan is likely to continue, added scrutiny of the exchange rate by the central bank presents a bit of a stumbling block to currency strength, albeit we don’t foresee particularly forceful action in the near future.

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