Foreign exchange trading reminder on October 29: The two central banks stood still, the dollar fell and the euro hit the biggest gain in May

On Thursday (October 28), the U.S. dollar index fell 0.52% to 93.37, falling below the 50-day moving average and hitting a one-month low; the month-end rebalancing model showed strong selling of the U.S. dollar against other currencies. The long end of the U.S. Treasury yield curve flattened, and the 30-year yield fell below the 20-year yield for the first time.

The US government reported that as of the second quarter of September, the annual rate of US gross domestic product (GDP) was only increased by 2%, which did not help the dollar. The recently announced US economic data is stronger, so it was previously expected that the data would not have much impact on the dollar.

The euro to US dollar rose 0.67% to 1.1681, the largest one-day gain since May; after breaking through the key resistance level of 1.1670, short covering and stop-loss buying appeared, and short-term option capital flows also supported the euro. Prior to the European Central Bank President Lagarde’s speech failed to suppress the market’s interest rate hike expectations, after Spanish data showed the biggest price increase in 30 years.

European Central Bank President Lagarde admitted on Thursday that inflation will remain high for a longer period of time, but refuted the market's bet that price pressures will trigger an interest rate hike next year at the earliest.

Before Lagarde gave a speech at the press conference, there was little change in the euro. As expected, the European Central Bank insisted in its policy statement to continue its plan to purchase bonds and lower interest rates. But some people believe that Lagarde's remarks are not as strong as market expectations in affirming the dovish stance of the European Central Bank.

Rabobank economists wrote in a report that Lagarde failed to respond adequately to market expectations for a rate hike next year.

The meetings of Australia, Japan and the European Central Bank drove trading activities, leading to increased volatility, and next week the Federal Reserve and the Bank of England will hold a meeting.

Mazen Issa, senior foreign exchange strategist at TD Securities, said the market is very sensitive to inflation concerns and the view that central bank actions are lagging behind economic development. The start of the week was calm, but after the Bank of Canada made tough comments on Wednesday, the exchange rate began to fluctuate sharply. One factor contributing to the increase in volatility is that as the end of the month approaches, more investment managers will adjust their portfolios among different currencies.

As central banks adjust their monetary policies during the epidemic, traders are trying to predict the trend of interest rates and inflation-adjusted yields in various currencies. In the unstable bond market, the yield curve has recently flattened, suggesting that the central bank will have to sacrifice support for the pandemic recovery and allow interest rates to rise in an attempt to curb inflation.

The pound rose 0.33% to 1.3790 against the dollar in late trading, but fell 0.32% against the euro; speculation about whether the Bank of England will raise interest rates at its November 4 meeting has recently hit the pound.

The U.S. dollar to yen fell 0.22% to 113.58. The Bank of Japan, as expected, insisted on its dovish stance at the meeting, maintaining the 10-year Treasury bond yield target and policy interest rate unchanged, and the yen exchange rate did not respond. The Bank of Japan lowered its consumer inflation forecast for the fiscal year ending March 2022 from 0.6% to 0%. As expected, overall inflation expectations have strengthened the market's bet that the Bank of Japan will lag behind other central banks in reducing crisis mode policies. Bank of America analysts continue to maintain their year-end target for USD/JPY at 116.

The Australian dollar rose 0.51% to 0.7556 against the US dollar, the highest level since July 6. On Thursday morning, the Reserve Bank of Australia refused to buy government bonds that are the core of its stimulus plan. The Australian dollar fell due to market speculation that the central bank would allow interest rates to rise earlier. . After the Reserve Bank of Australia issued a statement, the Australian dollar fell by 0.5%, but quickly regained its lost ground.

The Canadian dollar lags behind most currencies today. The U.S. dollar fell 0.11% to 1.2346 against the Canadian dollar. Yesterday the Bank of Canada hinted that the timing of raising interest rates was earlier, thus boosting the country’s currency. Goldman Sachs has advanced the timing of the Bank of Canada's interest rate hike to January 2022. Many analysts believe that 1.23 is the key near-term support level for the US dollar against the Canadian dollar.

The Norwegian Krone led the G-10 currency, up 1%. Previous data showed that the country’s retail sales unexpectedly increased last month, supporting the prospect of a planned interest rate hike.

Friday preview

Summary of Institutional Views

Goldman Sachs advances the timing of the Bank of Canada rate hike to January 2022

Goldman Sachs’ Daan Struyven and Sid Bhushan believe that, based on Wednesday’s new hawkish signals, the Bank of Canada is now expected to start raising interest rates in January instead of July. It is now expected that the first interest rate hike will be in the January 2022 meeting (previously expected to be July), and then interest rate hikes of 25 basis points in each of the three quarters. We assume 4 interest rate hikes of 25 basis points in 2022 (previously expected to be 1), 3 interest rate hikes in 2023 (previously expected to be 2), and 2 interest rate hikes in 2024 (previously expected to be 4).

Strategists wrote that the forecast adjustment was due to the Bank of Canada's hint that their tolerance for inflation is lower than previously thought. The Bank of Canada expects the first rate hike timing to be "mid 2022." Our new forecast implies that the terminal nominal policy interest rate at the end of 2025 is 3.0%, assuming that the economy expands again in the long term. The Bank of Canada’s focus has shifted from fully absorbing idle capacity to bringing inflation back to its target and preventing inflation expectations from getting out of control.

Nomura Securities: The Reserve Bank of Australia may weaken the yield curve control policy next week

Nomura Australia stated that the Reserve Bank of Australia may weaken its yield curve control policy next week. The most likely approach is to replace the target bond with a shorter maturity bond maturing in April 2023 in order to release the cash interest rate. A broader outcome may be possible. signal of. Strategist Andrew Ticehurst said that the Reserve Bank of Australia may even further shorten the target bond maturity, anchor bonds due in November 2022, or provide a range of target interest rates.

For the Reserve Bank of Australia, it will be easier to maintain bond yields within a range instead of reaching a precise target, and it will also allow the cash rate to adjust upwards if necessary. The Reserve Bank of Australia's decision on Thursday not to buy bonds maturing in April 2024 is not clear evidence that it will change the yield curve control policy, but some market participants may think this increases the possibility of such adjustments.