Sentiment weakened amid fresh pandemic-related restrictions in Europe. The S&P500 closed down 0.1% on the day, and risk-sensitive currencies and bond yields fell. Some hawkish Fedspeak partly reversed the latter. Currencies: The US dollar index closed up 0.5% on the day, at a 14-month high. EUR fell from 1.1360 to 1.1250 – a 16-month low. USD/JPY fell from 114.54 to 113.59 before recovering to 114.00, the safe-haven yen the outperformer. AUD fell from 0.7291 to 0.7227.
Interest rates: US 2yr treasury yields initially fell from 0.51% to 0.44% amid the European restriction announcements but later recovered to 0.51% amid hawkish comments from Clarida and Waller. The 10yr yield fell from 1.60% to 1.52% before consolidating. Australian 3yr government bond yields (futures) roundtripped from 1.14% to 1.10% and back, while the 10yr yield fell from 1.86% to 1.77% before consolidating. Markets continue to fully price the first RBA rate hike to be in July 2022.
Commodities: Brent crude oil futures fell 2.3% to $79, copper rose 2.4%, gold fell 0.7%, and iron ore rose 5.6% to $92.
Overnight Currency Range
AUD/USD 0.7228 0.7291
EUR/USD 1.1250 1.1373
GBP/USD 1.3410 1.3509
USD/JPY 113.58 114.54
NZD/USD 0.6991 0.7046
USD/CAD 1.2585 1.2663
USD/CNH 6.3806 6.3951
AUD/JPY 82.12 83.35
AUD/NZD 1.0333 1.0361
AUSD/USD ended the day on Friday 0.67% lower falling from a high of 0.7291 to a low of 0.7227. The US dollar climbed Friday as investors sought safe havens in fear of Covid contagion. Austria said it would be the first country in Western Europe to reimpose a full lockdown amid surging COVID-19 infections and Germany said it could follow suit.
After two straight down days, DXY is trading higher near 96 and on track to test this week’s cycle high near 96.241. Additionally, Federal Reserve Governor Christopher Waller said the US central bank should speed up the pace of tapering to give more leeway to raise interest rates from their near-zero level sooner than it currently expects if high inflation and the strength of job gains persist. Adding to the hawkishness, Fed Vice Chair Richard Clarida said it "may very well be appropriate" to discuss speeding up the Fed's asset purchase wind-down when it next meets, on Dec. 14-15.
Meanwhile, the Reserve Bank of Australia's governor, Phillip Lowe, has also been keen to point out the characteristics of the Australian labour market, specifically with respect to wage inflation. The RBA’s take on the Australian labour market is crucial to explaining the relative dovishness of the RBA. This message has been reinforced by the RBA fixing its guidance for rate hike directly to developments in wage inflation.
Eyes on the Fed minutes….Looking ahead to the week, the Federal Reserve minutes will undoubtedly reflect a range of views on risks, but with most officials seeing no rush for rate hikes given the large net drop in jobs and expected slowing in inflation. They will likely also make clear that realization of upside risks could lead to rate hikes soon after tapering ends, with the added point that tapering is highly unlikely to end before June.
Event Risk Data Today
Europe: Inflation is a key headwind for consumer confidence in November (market f/c: -5.2).
US: The October Chicago Fed activity index will provide a timely update on conditions in the region. Existing home sales should see a modest pull-back in October after September’s sharp rise (market f/c: -1.4%).