27/09/2021 - WEEKLY MARKET REPORT

Norwegian Krone soars as Norges bank hikes rates


We have been pushing for a while the idea that currency markets will now be mostly, if not exclusively, about the relative pace of central bank policy tightening, with inflation data a close second.


In line with this narrative, the Norwegian Krone was the week's best performer on the back of the first G10 hike of the cycle by Norges Bank. We add that market expectations of what these central banks will do and say seem to be remarkably dovish. The Federal Reserve seemed to do no more than validate most expectations with the suggestion that tapering will start in November, and yet investors sent yields violently higher, indicating that this was a hawkish surprise to most.


The sell-off in US rates as markets braced for the withdrawal of monetary stimulus hammered major emerging market currencies, all of which ended the week down against the dollar, save the Russian Ruble, which was buoyed by rising energy prices, especially in Europe. Meanwhile, the fallout from the Evegrande crisis in China continues to be limited.


With major September central bank meetings out of the way, focus should now shift to macroeconomic data, with inflation front and center. The September flash inflation report for the Eurozone will be published, and markets are expecting another jump in both the headline and core numbers to bring Eurozone inflation more in line with the US and the UK.


GBP


Sterling was torn between the undeniably hawkish meeting of the Bank of England and the newsflow of supply constraints, soaring energy prices and developing shortages. The big surprise from the BoE was that another MPC member, Dave Ramsden, joined existing hawk Michael Saunders in voting for an immediate reduction in the pace of QE purchases. Ultimately we think the former will have a longer lasting impact, especially as there

is a decent chance rates in the UK will go up ahead of every other major G10 country, possibly before the end of this year or, more likely, in early 2022.


We regard the recent weakness in sterling as a buying opportunity, as a tightening of monetary policy remains the key narrative for appreciation throughout the G10.


EUR


As in the US, macroeconomic data from the Eurozone is starting to take stagflationary overtones. The September PMIs of business activity pulled back, albeit from very high levels, on a general theme of supply chain disruptions, constrained output and increased pricing power. We fully expect the key flash inflation report out this week to confirm this.


Strategists have been busy revising their forecasts upward for both the headline and core numbers, but we still see room for a surprise. This would call into question whether the ECB can afford to lag other central banks in removing monetary accommodation and could be bullish for the common currency.


USD


The Federal Reserve September meeting seemed to surprise markets that had expected a more dovish message, even if the suggestion that the taper will start as soon as the next meeting was widely anticipated.


Markets may also have been spooked by the dot plot, in which half of the participants now expect a hike in 2022 rather than 2023. At any rate, bond yields in the US shot up and the dollar was dragged along with them, although perhaps not as much as may have been expected given the magnitude of the move in bonds.


This week, we would fade any moves resulting from the debt ceiling fight, which we regard as pure political theater. We will be paying close attention to the publication of the PCE deflator numbers, which have traditionally been the Fed's preferred measure of inflation.


CHF


The Swiss franc rallied last week and was one of the best performers in the G10. The behaviour in the currency was quite unusual, as after a significant jump in the first half of the week it held its ground in the second part, despite a move higher in US yields. As expected, the Swiss National Bank kept rates unchanged during last week’s meeting. Yet again, it called the franc “highly valued” and continued to reiterate it is willing to intervene

in the FX market. Changes to the bank’s conditional inflation forecasts were minor (+0.1 p.p. for both 2021 and 2022 compared to June).


Perhaps more significant is a downward revision to the expected GDP growth rate from 3.5% to 3%, which is linked mainly to the less dynamic expansion of consumer-related industries.


This week we’ll focus on the KOF economic sentiment and PMI data, out on Thursday and Friday respectively.

Aside from that, we’ll keep an eye on the US bond market. We’ve recently witnessed some large shifts in yields, which have generally had a strong impact on the franc in the past few months.


AUD


The Australian dollar ended last week lower against the USD, due to growing concern over a slowdown in global growth and falling iron ore prices, the country’s main source of export earnings.


Australian stocks also closed last week on a low note, amid worries over the domestic COVID-19 situation.


Victoria state reported its second-biggest daily rise in COVID- 19 cases since the start of the pandemic last week and the two largest cities, Sydney and Melbourne, and the capital Canberra remain in lockdowns. According to the RBA’s September meeting minutes, the outbreak of the delta variant had interrupted the recovery of the country in a manner that was more severe than expected a month earlier and that GDP is expected to decline in Q3. On the bond-buying programme, members assessed that tapering remained appropriate, as Australia's economy is expected to return to its pre-delta path by mid-2022, supported by an acceleration in vaccinations and a lifting of restrictions. The main economic data release this week will be on Tuesday, with the release of August retail sales figures.


CAD


The Canadian dollar ended last week higher against the USD. CAD was supported by strong data and a rise in crude oil prices, accompanied by a decline in the USD. Oil prices rose to a near 2-month high of around $73 per barrel last week, driven by rising demand for fuel and falling US crude inventories. Last week’s election result was also a modest positive for the Canadian dollar. Justin Trudeau’s Liberals remained the largest party, although he fell short of his goal of attaining majority control. This was a bit of a surprise as the latest opinion polls did not show a clear favourite between the Liberals and the Conservatives, and investors reacted to the continuation of the status quo by sending CAD marginally higher.


Elsewhere, Canadian retail sales declined less than expected, contracting by 0.6% on a monthly basis in July, well short of June's 4.2% increase. Sales decreased in 5 of the 11 sub-sectors in July as consumers adapted to the reopening measures across the nation. Regarding this week's data, the monthly GDP data will be released on Thursday, although this runs on a lag and will likely be ignored by investors. The much more timely PMI data for September (Friday) may be more closely watched.


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