EUR (1.156) ▼

• After weakening to below the 1.160 level in September, the EUR managed to appreciate to as high as 1.166 on Oct 19 amid weaker-than-expected US macroeconomic figures and better US corporate earnings. The EUR was also supported by the ECB's Lagarde statement. However, the gains were short-lived as the single currency weakened slightly against a strengthening USD on the last trading day of October.
• EUR may trade in the range of 1.150 to 1.160 with a downside bias against the USD in November as the USD index is expected to trade above the 94.0 mark amid Fed's monetary tightening expectations. Nevertheless, the bloc’s currency will continue to be supported by Europe's recovery progress.

GBP (1.368) ▼

• GBP rebounded against the USD in October, driven by market expectations that the Bank of England (BoE) could raise interest rates as soon as November. This comes off the back of the UK’s easing energy crisis, recovering labour market, and rising inflationary pressures.
• Nonetheless, the GBP may weaken this month as a resurgence of COVID-19 cases in the UK raises concerns about new lockdown measures. Likewise, some members of the BoE have suggested that the central bank would hold off rate hikes for now, which may weigh on cable should the US Fed announce tapering.

AUD (0.752) ▲

• AUD surged to a four-month high in October, primarily due to higher core inflation reading which raised concerns of early rate hikes despite RBA repeatedly being firm with its dovish stance. Strong commodity market as well as risk-on sentiment amid global economic reopening also push AUD higher.
• The risk-sensitive AUD would be continuously supported by elevated commodity prices, possible talk of early rate hikes, and risk sentiment as Australia finally opens borders for international travel from November 1. Nonetheless, the upside may be limited due to the expected US Fed hawkish turns.

NZD (0.717) ▲

• NZD rallied in October to a level last seen in May 2021 due to rate hikes by RBNZ amid rising inflation which currently exceeded the RBNZ's 1.0-3.0% target band.
• The near-term outlook remains positive for NZD as the RBNZ is expected to embark on another 25 basis points hike to 0.75% of its official cash rate in the November meeting. This will be further bolstered by relaxation in COVID-19 containment measures and the easing border restrictions from November.

Performance of major currencies to be impacted by upcoming central bank policy decisions

• As developed economies exit from the worst of the pandemic and as global inflationary pressures remain persistently elevated, the tail-end of 2021 will see a near-term divergence in monetary policies. Above all, the US Fed is expected to announce the tapering of its bond buying programme during its Nov 2 – 3 meeting, which markets will consider as a policy tightening move that should lift US Treasury yields higher and bolster the USD.
• On the other hand, the ECB has decided to refrain from tapering its general bond-buying scheme, although it has already reduced the pace of its Pandemic Emergency Purchase Program. Moreover, ECB President Lagarde has rejected the idea of earlier rate hikes in 2022, taking a decidedly dovish stance that goes against market expectations. Likewise, while the BoE’s recent rhetoric has been hawkish and the market has already priced in a rate hike this year, a resurgence of COVID19 cases and the end of the UK’s furlough scheme has raised economic uncertainty. This will probably keep the BoE from hiking rates at its Nov 4 meeting, which could disappoint the market.
• Similarly for Australia, the market appears to be pricing in an earlier rate hike in 2022, but the RBA may maintain a relatively dovish stance at its Nov 2 meeting. This is due to the expectation that Australia’s economic growth contracted in 3Q21 on renewed lockdown measures, whilst core inflation has only just entered the 2.0 – 3.0% target range. However, the RBNZ will likely continue to outpace the US Fed by further raising its official cash rate to 0.75% at its Nov 24 meeting.

Source: Kenanga Research - 1 Nov 2021