Monthly Update: November 2021
“Despite worrying inflation, November began with central bankers, especially those outside the US, opting for a wait-and-see approach to policy changes. It ends in a risk-off market, with increasing uncertainty around global growth prospects. The dollar has benefitted from both. This month the US found itself with the highest rate of inflation in a generation, which sparked volatility in currencies around the world. With Jerome Powell reappointed to his seat, it will be hard for him to avoid the prospect of Fed rate increase in June, followed by another in November 2022.”
Sam Cornford, Partner & Head of Trading
Two pieces of legislation have dominated headlines in the United States in the past month: The Build Back Better Bill and The Infrastructure Bill. The House of Representatives passed the Build Back Better Bill on November 22nd along party lines. It was all but inevitable that the House would pass the Bill after the Congressional Budget Office released its final cost projection for the legislation, estimating that the bill would not add a significant amount to the deficit. The $1 trillion infrastructure bill received bipartisan support in the senate and was signed into law on the White House lawn around the middle of the month, following months of back and forth in the House of Representatives. Labour Department data showed that the CPI rose by 6.2% year on year this month. Investors have been on tenterhooks this month, waiting for the US central bank to taper its asset-purchase programme after announcing that a $120 billion-a-month asset-purchase scheme would be wound down. Alongside this, Biden has selected Jerome Powell to serve a second term as Federal Reserve Chair, with competitor Lael Brainard to be appointed as Vice Chair.
UK inflation has soared at the fastest rate for almost ten years during November, as the cost of living rose by 4.2% because of rising fuel and energy costs, based on CPI data released by the ONS. Equally, the ONS announced that UK economic growth was occurring at a rate of 0.6% month to month, however, the rate of economic growth in February 2020 was 1.2%. The data shows that the output in all sectors of the economy remains below pre-crisis levels. During a trade and investment week hosted in London, the UK announced a new export target this week of £1 trillion per year by 2030 as part of Boris Johnson’s strategy to show the benefits of exiting the European Union. Boris Johnson’s government, under the guidance of Alok Sharma as COP26 President oversaw the signing of the Glasgow Climate Pact on November 14th at the climate change summit. Countries agreed to “phase down” rather than “phase out” coal, amid expressions of disappointment and surprise at a late U-turn which saw the language in the agreement to be changed.
Sterling is lower against the dollar and stronger against the euro, compared to a month ago. November started with a much-anticipated Bank of England meeting, and the markets believed that the BoE would come out of it as the first of the world’s big central banks to raise rates since the pandemic began. The Bank decided to keep interest rates on hold, leaving the pound with the biggest drop against the dollar since September – and many hedge funds with stinging losses. When the dollar soared on hot US inflation, the pound reached 11-months lows, and even the better-than-expected GDP data in Britain did little to support the pound. Sterling saw moderate gains when the EU said it was committed to coming to an agreement with the UK regarding Northern Ireland and rose further when data showed that British employers hired more people in October after the furlough scheme ended. Expectations of a BoE hike were boosted once again after data showed UK inflation at a 10-year high.
The euro is lower against the euro and the pound than it was a month ago. The single currency continued to suffer under the same pressures for yet another month: the ECB’s policy, which is still lagging far behind that of the Fed. Christine Lagarde reiterated that message in the first days of October, saying it was very unlikely that a rate hike would occur in 2022. Amid the surging dollar and growing expectations that interest rates will be tightened sooner elsewhere, investors became increasingly bearish on the outlook for the single currency. Lagarde appeared before the European Parliament Committee on Economic and Monetary affairs in the third week of November, pushing back on calls and market bets for tighter policy with more dovish comments. The news of a lockdown in Austria (and the possibility of the same measures in Germany) caused serious concerns about the continent’s growth prospects, weakening the euro further.
Compared to the previous month, the dollar is stronger against the euro and the pound. The greenback started November by losing some ground after the Federal Reserve said it would not rush to raise interest rates. At the same time, the Fed announced a $15 billion monthly cut to its $120 billion in monthly purchases of Treasuries and mortgage-backed securities: in other words, a “dovish taper”. Positive payroll data helped the dollar recover, pushing the dollar above one-year highs. The second week of the month revealed another surprise, as consumer prices soared at the highest rate in more than 30 years, undermining the Fed’s insistence that inflation that inflation is only transitory. The global currency markets saw great volatility, with the dollar rising sharply and the markets betting on a US rate hike as early as mid-2022. The dollar growth was briefly interrupted by a report showing that consumer sentiment dropped to the lowest in a decade. Shortly after that, the rally continued, supported by strong data and a risk-averse mood prompted by the European forth wave of Covid infections. In the last week of the month, Jerome Powell was nominated for his second four-year term as the Fed’s Chair, which gave markets more confidence that of a rate hike next June.
The Canadian Dollar has weakened at the end of November, dipping towards a two-month low in a period of volatility for the Canadian currency. The weakened loonie comes amid a surge in the US dollar and lower oil prices, whilst Canada’s inflation figures revealed that prices across a basket of goods and services in the economy rose 4.7% in October. As US Federal Reserve Chairman Jerome Powell was reappointed, bets on higher interest rates were bolstered whilst one of Canada’s major exports, oil, traded around $78 a barrel – a significant 8% fall from the middle of November. A ‘hawkish’ reappointment by President Biden to Federal Reserve Chair forced US 10-year treasury note yields up drastically. It is mainly the US dollar’s success across the month which caused the dip in the USD-CAD pairing. Statistics Canada revised GDP forecasts for 2020 this month to show the economy had grown 0.4% more than expected, giving the Canadian dollar a boost. The longer-term picture remains strong for the loonie which was the top performing G10 currency across 2021 and the future looks bright as the first central bank from a G7 country to cease quantitative easing (QE) in October and signalled it could begin raising interest rates in April 2022.
The Australian Dollar continued its decline compared to the USD during November. Similar trends are visible when compared to the Euro over the course of November, with a high point at midway through the month. The AUD’s dwindling started when the Reserve Bank of Australia (RBA) pushed back against rate-hike bets. The tumble in the price of iron ore, Australia’s biggest export earner, adds to the fragility of the gains posted by the Aussie since recovering from its 2021 low in August. For a while, the RBA has been engaging in a modest Quantitative Easing (QE) policy that is used to purchase government bonds to help to keep yields low at medium-term tenors of around two to three years duration. The RBA aimed to keep the three-year yield down to around 0.1% with its QE. However, it lost control after the latest inflation data release and then it capitulated. Still, the lifting of pandemic lockdowns in Sydney and Melbourne, and strong terms of trade, provide hope for investors betting that currency can resume its rally.
What to look out for
1 December: OECD Economic Outlook
2 December: EU Summit – 2022 Budget discussion
7 December: US Balance of Trade
10 December: US Inflation Rate YoY
13 December: UK BoE Financial Stability Report & Financial Policy Summary
14 December: UK Unemployment Rate Oct
14 December: Markit Eurozone Composite PMI
15 December: UK Inflation Rate YoY
15 December: US FOMC Economics Projections
15 December: US Fed Interest Rate Decision
16 December: UK BoE Interest Rate Decision
16 December: EU Council meeting of the ECB
23 December: US Personal Income MoM Nov