Daily Market Outlook, November 8, 2021

Overnight Headlines

U.S. CPI in focus as inflation concerns persist U.S. inflation data will be the main focus for markets this week. Equities rallied and bond yields eased last week when the Federal Reserve, Bank of England and Reserve Bank of Australia played down inflation concerns and maintained that mainly transitory factors are pushing up prices. There is a camp that believes the central banks are underestimating inflation pressures and falling behind the curve. Hotter-than-expected U.S. CPI and PPI will harden those views. Core CPI is expected to rise 4.3% year-on-year, up from 4.0% in September. Other data out of the U.S. includes weekly jobless claims and University of Michigan consumer sentiment. It will be a quiet week in Europe, with German ZEW the featured release. German trade and inflation data and the euro zone Sentix Index and industrial production are also due. UK Q3 GDP will be released in the week ahead, along with IP and trade data. PPI and CPI will be the key data out of China, while October lending data is also due. Japan's calendar includes current account and trade balance for September. Australian employment data will be released this week, with the market expecting a 50,000 rise in jobs after September's 138,000 drop. No top-tier data is due in New Zealand or Canada.

Investors trimmed their bullish bets on the USD for a fourth consecutive week ahead of the Federal Reserve’s policy decision on Wednesday. The aggregate USD long position fell by USD757mn to USD19.8bn. This is still relatively close to its early-October high of USD23.2bn, however, representing a sizable USD long position that reflects solid bullish sentiment in the greenback as markets look to the beginning of the Fed’s hiking cycle.

The EUR’s net short saw the biggest week on week change of the currencies covered in this report, with a USD737mn reduction to total USD888mn and declining from as high as USD3.2bn a month ago through a week that included the ECB’s decision last Thursday where it held all of its policy settings unchanged. The weekly change reflects a decrease in shorts of about 10.5k contracts while longs were trimmed by 5.1k contracts. The NZD long saw the second largest increase in the week with USD348mn added to the now USD986mn bullish position (its highest level since March).

The GBP’s net long was left practically unchanged at USD1.3bn following a large USD1.1bn buildup the previous week with no clear sense of guidance in the days leading to the Bank of England’s announcement on Thursday. The quick increase in GBP longs of the previous three weeks from a net bearish position of USD1.7bn in early-October came amid strong signaling from BoE officials in recent weeks that they would hike this week. In the week to Tuesday, short and long positions increased by about 5k contracts each. The BoE’s rate hold and guidance that rate increases may wait until February has likely seen a significant share of these recently acquired longs unwound with the GBP reaching a five-week low this morning.

Similarly, speculative accounts trimmed the large AUD short by only USD36mn to USD5.6bn (the second biggest bearish position in this report). The near-absence of movement in the Aussie’s position likely understates the worsening of AUD sentiment in recent days after the RBA held on to its guidance that it will not hike until 2024; expectations that it could hike as soon as late-2022 likely saw a reduction in the net AUD short prior to the Tuesday decision.

Elsewhere, the small CAD bullish position saw a marginal increase of USD67mn to USD335mn in similar size to the USD85mn increase in the JPY short to USD11.8bn. The yen’s haven/funding peer, the CHF, also saw a USD189bn increase in net bearish bets to USD2.8bnbut the MXN’s bearish position (as a typical target of carry trades) also rose by USD157mn to USD1.2bn