Daily Market Outlook, November 2, 2021

Overnight Headlines

Manchin Won't Commit To Backing His Party's Spending Bill
White House 'Confident' Manchin Will Back Reconciliation
France Pulls Back In Brexit Fish Row, Gives Talks More Time
OBR Warns UK Chancellor May Struggle To Meet Fiscal Rule
Japan To Ease Entry For Business, Students But Not Tourists
RBA Opens Door To An Earlier Rate Rise, Pledges Patience
Australia 3-Year Bond Erase Losses As RBA Damps Hike Bets
Dollar On Solid Footing Into Fed; Yen Dips On LDP Victory
Oil Prices Rise On Reports Of Slow OPEC Oil Output Increase
China Tech Stocks Jump On Signs Of Easing Trade Tensions

The Day Ahead

US equity markets closed at fresh all-time highs, but Asian markets were mixed this morning. The Reserve Bank of Australia left its cash rate unchanged at 0.1%, but scrapped its target for bond yields. In the US, there were reports that Congress may need more time to assess President Biden’s proposed $1.75tn fiscal package. Closer to home, France’s retaliatory measures against the UK on fishing rights were delayed as talks continued.

Monetary policy updates from the US Federal tomorrow and the Bank of England on Thursday remain the key focus this week. In particular, markets are fully priced for a 15bps interest rate increase to 0.25%, although economists are pretty much evenly split between a rise and no change at 0.10%. In terms of economic releases, it remains relatively quiet before that.

Today’s October PMI manufacturing update for the Eurozone is a second reading which is expected to confirm the initial estimate. That showed a fourth consecutive fall in the headline index, albeit marginally from 58.6 to 58.5, reflecting ongoing evidence of supply bottlenecks. It still remains well above the key 50 level separating expansion and contraction, although the output sub-index showed more signs of the impact of supply constraints, falling to a 17-month low of 53.2.

In the UK, there are no major economic data releases, but Chancellor Sunak is scheduled to testify to the House of Lords Economic Affairs Committee on his Budget statement. The Chancellor is expected to be questioned on a range of topics, including the labour market after the end of the furlough scheme and the persistence of high inflation. UK 10-year gilt yields closed up 3bps at 1.06%, while their US counterparts were slightly lower overnight at 1.55%. Brent crude oil rose above $85 a barrel. In the currency markets, the Japanese yen outperformed, while sterling was little changed.

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 )

USDJPY - 115.00/10 430m. 114.20 642m. 113.50 430m. 111.10 440m.

EURUSD - 1.1790/1.1810 1.46bn (1.17bn P). 1.1690/1.1700 798m. 1.1660/70 1.50bn (1.15bn C). 1.1640 811m. 1.1600/20 712m. 1.1570/80 2.12bn (1.54bn C). 1.1550/60 459m. 1.1540 445m. 1.1490/1.1500 1.38bn (P).

GBPUSD - 1.3800 587m.

USDCAD - 1.2550/60 916m.

EURGBP - 0.8500/20 778m. 0.8440 580m.

USDTRY - 10.00 655m. 8.50 946m.

USDCNH - 6.37 900m.

This week's larger FX option strike expiries

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.

There's nothing substantial in USD/JPY until the wake of the U.S. Federal Reserve policy announcement on Thursday – $1.2-billion 113.00, $1.7-billion 114.00, $1.5-billion 114.30, $1-billion 115.00, and $850-million strikes at 115.30. Friday has $1.2-billion at 113.70, $600-million at 114.25, and $841-million at 115.00.

The biggest EUR/USD strike is Tuesday at 1.1585 on 1.6-billion euros, with 810-million at 116.45, and 1.2-billion euros at 1.1495-1.1500. Wednesday has 900-million euros between 1.1585-1.1600. Thursday has 600-million euros at 1.1500, 1-billion 1.1515-25, and 685-million euros at 1.1550. Friday has 800-million euros between 1.1560-75.

GBP/USD's biggest strikes are on Wednesday – 544-million pounds at 1.3550. 571-million at 1.3615 and 476-million pounds at 1.3650. Thursday has 460-million pounds at 1.3825. EUR/GBP has 581-million euros at 0.8440 and 440-million at 0.8525 Tuesday. Wednesday has 400-million at 0.8400, and 440-million at 0.8465. Thursday has 780-million euros at 0.8520-25, and Friday has 1-billion euros at 0.8440, and 444-million euros at 0.8550.

The biggest AUD/USD strikes are Wednesday at 0.7350 on A$742-million, Thursday at 0.7500 on A$694-million, and Friday at 0.7500 on A$465-million. USD/CAD has $747-million at 1.2350 Monday .... Wednesday has $900-million at 1.2450. Thursday at 1.2420 on $500-million, and $1.2-billion between 1.2555-75. There are $700-million between 1.2375-1.2400 Friday, along with $760-million 1.2500-05.

1.5-billion euros of a EUR/SEK strikes at 10.27 look unlikely to come in to play on Wednesday, but look out for $800-million USD/SEK at 8.5800 that day.