EUR (1.157) ▼

▪ Despite European Central Bank’s (ECB) mild hawkish turn and a surprise increase in EU economic sentiment, EUR depreciated by more than 2.2% to its weakest level in 14 months in September. The weakness in the bloc’s currency was mainly due to a sharp rise in the USD index (DXY) after Chairman Powell said that tapering decision may be announced as early as November.

▪ EUR may continue to depreciate against the USD in October if the DXY continues to trade around the 94.0 level amid hawkish Fed outlook. However, the bloc’s currency may pare some losses if the ECB makes any announcement on tightening its monetary policy.

GBP (1.343) ▼

▪ GBP deteriorated significantly against the USD in September, falling to its lowest level since December 2020. The sterling was pressured by a robust US dollar, amid a surge in US Treasury yields, as well as by market fears about the UK’s energy crisis and government reshuffle.

▪ GBP may continue to weaken this month, as the UK’s supply chain issues and persistently high inflation, raise concerns about its economic recovery. Furthermore, despite the Bank of England indicating a preference towards tapering bond purchases soon, the uncertain economic outlook may discourage it from tightening monetary policy this year, which could weigh on cable.

AUD (0.719) ▲

▪ In September, AUD depreciated against the USD as riskoff resumed amid growing concerns over the global growth outlook due to China's power crunch and the Evergrande debt crisis. AUD was also pressured by broad-based gains in USD and rising US Treasury yields.

▪ AUD may be supported by economic reopening optimism as the federal government is expected to reopen international borders when the 80.0% vaccination threshold is achieved. Besides, more states are expected to lift lockdown measures on the back of higher vaccination rates.

NZD (0.686) ▲

▪ NZD plunged in September as new daily COVID-19 cases surged to the highest level in one month, a week after the government lifted the emergency alert. Fed tapering talks, China Evergrande debt crisis and US debt limit standoff further weighed on the kiwi.

▪ Although the recent surge in COVID-19 cases may impact the near-term outlook, the Reserve Bank of New Zealand may continue with the rate hike in its upcoming MPC meeting, subsequently supporting the NZD. This is mainly due to the prospect of recovery amid the progress of vaccination program and the government's ability to manage the pandemic.

Source: Kenanga Research - 1 Oct 2021