JASPER’S MARKET SQUAWK 20-11-2023

Bankers Warn No Victory on Inflation

Recent US economic data led the dollar to lower, with increasing bets that the Fed will not pursue further hikes. Despite traders becoming more optimistic about a potential “Goldilocks” scenario, US and EU bankers continue pushing back against rising expectations of rate cuts.

Chart: EURUSD

Key Factors for Today

• Bankers Sound Caution as Rate Cut Expectations Rise
• Dollar Hits 11-Week Low Amid Speculation of Rate Cuts
• WTI Crude Soars 4.40% On Renewed Supply Concerns
• ECB Speakers Stands Firm Despite CPI Continuing to Fall
• UK Retail Sales Disappoint, but Christmas Optimism Remains
• USDCNY Slips to August Low After PBOC Holds Rates

Dollar to 11-Week Low Despite Hawkish Speak

Weaker-than-expected US job market data inflation has raised expectations that the Fed will ease monetary conditions earlier than expected. As a result, the dollar slid to an 11-week low on Friday on rising expectations that rates have peaked and the focus on the timing for the Fed to start cutting rates, with a 30% chance it could be as early as March. Despite the favourable data, Fed speakers revealed hawkishness and caution, indicating a potential divergence in perceptions. Regardless, the market appeared to have won the battle, with the DXY dropping some 0.55% to 103.81 Friday, forming a local top at 104.40 and exposing 103.50.

WTI Soars 4.40%, Driven by Supply Concerns

Despite higher crude oil inventories, rumours that OPEC is set to consider further supply cuts when it meets on November 26 reversed oil prices on Friday. WTI was also supported due to a potential supply disruption in Russian crude trade after Washington imposed sanctions on three ships headed to India. The EU Commission also proposed bans on sales to Russia and using tankers for crude, adding fuel to the rally. Despite mocking away from the regional support of 72.20, crude remains at risk of further weakness while trading below 80 a barrel.

ECB Rhetoric Just Won’t Change Despite Falling CPI

Central European bankers pushed back on declaring victory on inflation despite the latest CPI falling for the seventh month in a row at 4.2%. Markets appeared to dismiss the rhetoric from several ECB officials that rates could be kept “high for longer”, suggesting a widening divergence between markets and policymakers, but the euro was up against the dollar as the latter traded lower. The pair rose 0.52% past 1.09, leaving behind support at 1.085 and opening the door to 1.0984.

UK Retail Sales Disappoint, But Christmas Is Near

UK retail sales contracted 0.3% against expectations of a 0.3% rise in October, impacted by the cost of living, reduced footfall, and wet weather in the second half of the month. The yearly figures dropped to -2.7%. However, major retailers remained confident in the run-up to Christmas. BOE Deputy Governor Dave Ramsden said that differences between expectations and the bank’s projections suggest a more positive outlook for the output-inflation trade-off. Meanwhile, Finance Minister Jeremy Hunt noted he will not implement tax cuts that could contribute to inflation, following pressure from Conservative lawmakers. The British pound rose on Fri and early Monday as the dollar remains weak overall, with 1.25 and 1.24 in focus.

USDCNY to August Low Following PBOC Rate Hold

China left its 1-year and 5-year lending rates unchanged as a weaker yuan limited its easing options, and policymakers preferred to stick to a wait-and-see approach to comprehend the effects of previous stimulus on credit demand. Recent data did show that China’s recovery remains patchy, too, with only industrial output and retail sales surprising to the upside but deflation gathering pace. The yuan spiked higher following the Monday news, with USDCNY slipping under 7.17 to an August low. However, further cuts would widen the yield gap with the dollar, risking capital outflows.

On The Docket

• DE PPI
• BOE Gov Bailey Speech
• ES Consumer Confidence

FX 1-Day Relative Performance (USD)

• Aussie and Kwiw 0.54% and 0.59% higher
• Euro up by 0.09%, Pound higher at +0.20%
• Loonie 0.06% up, Frank barely positive at 0.03%
• Japanese yen up by a substantial 0.24% gain
• Gold down 0.09%, Silver lower down at -0.64%
• Crude and Brent in the green by 1% and 0.98%
• Natural gas in the red zone, down 1.08%