Daily Market Outlook, November 16, 2021

Overnight Headlines

Biden Tells Xi U.S. Doesn't Support Taiwan Independence: CCTV
Fed’s Barkin Urges Patience In Reviewing Speed Of Bond Taper
Fed’s Kashkari: Fed Shouldn’t Overreact to ‘Temporary’ Inflation
EU Open To More State Aid For Semiconductors Amid Supply Crisis
France Seeks Reform Of Euro Zone Debt Rules - Handelsblatt
UK PM Johnson: Invoking Article 16 Would Be Perfectly Legitimate
BoJ Is Said To Be Reviewing It’s Regional Bank Support Program
China State-Run Developers Rush To Sell Yuan Debt In Easing Sign
Dollar Eases, Yuan At 5-Month High As Biden-Xi Talks Sound Friendly
Oil Prices Bounce Back On Tight Inventories, Demand Worries Limit Gains
China Says It'll Charge Punitive Rates On Households Mining Crypto
Asia-Pacific Shares Mixed As Investors Digest Biden-Xi Three Hour Talk

The Day Ahead

Asian equity markets are mixed this morning. So far, no comments of substance have emerged from the virtual summit between US President Biden and Chinese President Xi. Some former US Federal Reserve policymakers have called for an early tightening in monetary policy in response to growing inflationary pressures but current rate setters Barkin and Kashkari urged patience.

The just released UK labour market report showed a rise of 247k in employment in the three months to September, while the unemployment rate fell to 4.3% from 4.5%. Meanwhile, annual wage growth slowed to 5.8% from 7.2%, but the data is still so distorted by pandemic effects that it is still hard to gauge underlying pay conditions. Most of the report covered the period before the Government’s furlough scheme expired. However, a fall in benefit claims in October alongside a further rise in the number of employees on PAYE and a record level of vacancies suggests that the job market has initially remained buoyant. The next report, which will be released just before the Bank of England’s December monetary policy update, will provide more evidence on the first impacts of the end of the scheme.

In the Eurozone, Q3 GDP growth is a second reading that is not expected to be revised from the initial increase of 2.2%. However, the report will give more detail on the drivers of growth. The Q3 employment report will show how many jobs were created during the quarter.

US retail sales are forecast to show a big monthly rise of 1.1%. Much of that is due to the sharp rise in inflation (the US numbers are not adjusted for prices). However, there have also been signs of late that after a soft patch over the summer, spending on items that are less affected by supply constraints has accelerated. So, look for an increase in spending in real terms. US industrial production is expected to rebound in October, after a big fall in September, and post a 0.9% gain despite ongoing concerns about supply constraints.

The UK inflation report due early Wednesday is expected to show a sharp rise. Look for annual headline CPI inflation to reach 3.9%, up from 3.1% in September. That is likely to primarily reflect higher energy prices after Ofgem raised its price cap. Core inflation (excluding food & energy) is also predicted to increase but more modestly to 3.1% from 2.9%. Inflation seems set to move decisively above 4% in November and probably even higher in the near term with the BoE forecasting a peak of around 5% in April next year. However, inflation is then still generally expected to start to ease back from H2 2022 onwards.

Government yields rose in the UK yesterday after BoE Governor said that the decision not to raise interest rates at this month’s policy meeting had been a close-run thing. Bond yields in the US and other markets also rose as inflationary pressures remained in focus. In currency markets, the US dollar has continued to appreciate while sterling has moved up against the euro.

G10 FX Options Expiries for 10AM New York Cut

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1370 (355M), 1.1450 (720M)

GBP/USD: 1.3400 (383M), 1.3450 (210M), 1.3500 (407M)

EUR/GBP: 0.8395 (455M), 0.8465-75 (544M), 0.8525 (810M)

AUD/USD: 0.7250 (371M), 0.7300 (606M)

EUR/CAD: 1.4395 (594M)

USD/JPY: 113.40-50 (1.3BLN), 114.30 (1.6BLN)

Standout FX option strike expiries for the week ahead

(Reuters) – The hedging of FX option strikes can influence FX price action if nearby, and more so when the strikes are large and soon to expire, so it's worth being armed with this information in advance.

Standout EUR/USD strikes this week are on Wednesday between 1.1495-1.1505 on 2.3 billion euros. Thursday has 860 million euros between 1.1450-60, and 500 million euros at 1.1500. Friday has 550 million euros at 1.1445-50 and 1 billion euros at 1.1495-1.1500. The biggest USD/CHF strikes are Thursday at 0.9120-25 on $573 million and Friday between 0.9110-25 on $1.3 billion.

For GBP/USD – Tuesday has 353 million pounds at 1.3400 and 407 million pounds at 1.35. Thursday has 790 million pounds at 1.3400, 507 million pounds at 1.3500 and 604 million pounds at 1.3550.

EUR/GBP has 460 million euros at 0.8520 on Tuesday. Wednesday has 689 million euros at 0.8445 and Thursday has 800 million euros at 0.8400 and 759 million euros at 0.8450-60. Friday has 857 million euros at 0.8515-25 and 887 million euros at 0.8600.

AUD/USD has A$606 million at 0.7300 on Tuesday and A$646 million at 0.7300 on Wednesday. There are also A$524 million at 0.7450 on Wednesday. Thursday has A$735 million 0.7250-65, A$486 million 0.7405-10, A$433 million 0.7385 and A$1 billion between 0.7430-45.

The biggest USD/CAD strikes are Wednesday at 1.2545-50 on $705 million. Thursday at 1.2330 on $1.2 billion, 1.2380 on $770 million and 1.2500 on $1.1 billion. Friday has $1.6 billion at 1.2350-55 and $550 million each at 1.2370 and 1.2475.

Standout USD/JPY strikes this week are on Tuesday at 113.40-50 on $1.3 billion and 114.30 on $1.6 billion. On Friday there are $1.3 billion between 113.90-114.00 and $1 billion at 114.20-25.

Technical & Trade Views

EURUSD Bias: Bearish below 1.15 Bullish above

Claws back some ground but trend is for lower still
EUR/USD opened -0.67% at 1.1366 after falling sharply on break of 1.1400
A dovish turn in ECB expectations was the catalyst for the fall
After trading at 1.1360 it tracked higher on short-covering
Heading into the afternoon it is trading just below session high at 1.1385
EUR/USD trending lower with the 5, 10 & 21-day MAs in a bearish alignment
Only a break above the 10-day MA (1.1502) would suggest bottom is in place
The objective of the move is the 61.8 of the 2020/2021 move at 1.1290
US retail sales later today will be the main driver of the next move
Traders have grown more bullish USD versus funders like EUR recently
Option premiums for volatility and downside strikes grew as EUR/USD fell
Short date implied vol now peaks - consistent with current FX consolidation
Longer dated implied volatility remains firm - 2022 warnings
Risk reversals hold highest EUR put vs call vol premium since May 2020

GBPUSD Bias: Bearish below 1.36 Bullish above.

Bid with risk, though the base remains the weak side
+0.15% at the top of a quiet 1.3412-1.3434 range with softer safe-haven USD
No fireworks yet from the Bide-Xi meeting, which is good news for risk
UK employment data event risk - poll - 4.4% unemployment rate, +185k jobs
Charts 5, 10 & 21 daily and weekly MAs slide, 21 day Bollinger bands slip
Momentum studies conflict - downtrend targets 1.3166, 38.2% 2020-21 rise
1.3482 10 DMA is initial significant resistance, 1.3619 21 DMA pivotal
Friday's 1.3354 low and 1.3314 lower 21 day Bollinger band first support
IMM speculators flipped to net GBP short on dovish BoE hold
IMM speculators cut gross GBP longs by 3,251 contracts in week ended Nov 9
They also raised gross GBP short positions by 23,889 contracts to 66,097
Combination flipped net position to GBP short: 12,093 contracts
First net GBP short position for four weeks
Bearish shift in GBP bets fuelled by BoE's rate hold on Nov 4
On Monday, BoE's Bailey said he is very uneasy about inflation

USDJPY Bias: Bullish above 112.50 Bearish below

Gently bid with risk appetite, as Biden and Xi talk
+0.05%, with risk gently bid - AUD/JPY +0.3%, EUR/JPY +0.2%
Early tone of Biden-Xi meeting seems mildly positive...
If they agree to disagree on major issues, it will be progress
Regional stocks and commodities are gently bid, 10yr UST -1bp to 1.608%
Charts, choppy consolidation below 114.70 October range high continues
Kijun line cross of the Tenkan line suggests the topside is the weak one
Kijun line provided support on the way up - today at 113.71
Tokyo 114.10-114.31 range is initial support and resistance

AUDUSD Bias: Bearish below 0.75 Bullish above

AUD/USD opened +0.22% at 0.7347 after risk currencies soared against EUR
AUD/USD started moving higher after RBA minutes showed less confidence in benign inflation outlook
RBA Lowe's speech dismissed calls for 2022 rate hikes, but AUD/USD kept rising
AUD/USD traded to 0.7368 and is trading 0.7360/65 into the afternoon
Resistance is at 10-day MA at 0.7371 and break would suggest bottom forming
A break above 0.7375 targets the 21-day MA at 0.7436