Repricing of central banks approach drives the markets (Daily analysis 05.11.2021)

Trends on the bond market are unfavourable for the currencies of emerging economies. At the same time, they support the strengthening of the dollar, especially against the euro, which has no assets on its side.

The EUR/USD was not only unable to remain anchored above 1.16 but actually approached this year's lows again. The dollar has a strong rally behind it; the obstacle to its continuation should be the firm valuation of policy normalisation and the rapid abandonment of crisis instrumentation.

At the same time, growth in Europe is slowing while it is accelerating in the US. This should be confirmed by today's data on the condition of the labour market in October. The Fed is beginning to put crisis policy to rest - this is not the intention of the European Central Bank, which will raise interest rates at least a year later. Western Europe is more sensitive to expensive commodities than the US, rich in oil and gas. These are not circumstances that suggest a significant upside potential for the EUR/USD pair.

The franc is on a roll; the pound is below in red

This translates into a decline in the EUR/USD and the EUR/CHF, in line with the rule that a troubled euro means a stronger franc. From our perspective, this means that the US and Swiss currencies are rising even more strongly than the euro. The pound became a victim of over-inflated expectations about the central bankers' intentions. Its five minutes ended with a bang. The Bank of England did not raise rates yesterday, which was largely priced in by investors. The market valuation was for as much as an 80bp hike in the next six months. When it became clear that it was too high, the British currency collapsed. Yesterday, it lost the most against the dollar since the Brexit chaos in September 2020, it suffered one of the strongest discounts this year against the euro and GBP/PLN, despite the weakening of the zloty against other currencies, deepened falls towards 5.35 and is now almost 2.5% below the peak at the end of October, located almost at 5.50 PLN.

The Czech koruna with strong advance, the Norwegian krone continues its downward correction

The situation is quite the opposite for the Czech koruna. The Czech currency appreciated sharply after another interest rate hike. The movement is due to the scale of the adjustment, which amounted to a record 125 bp. In less than six months, the cost of money rose from 0.25 to 2.75 per cent. We have repeatedly written that the front runners in the currency pack will be those currencies whose monetary authorities deliver the increases valued by investors. The CNB is more than doing so and is leading the regional fight against inflation. However, such an aggressive cycle will see the tightening end sooner and may require a quick reversal. The EUR/CZK pair is not expected to go permanently below 25.00; the Czech koruna is balancing on the edge of overvaluation.

There was no further move in Norway, the first to start raising interest rates out of all developed economies this autumn. Still, it was confirmed that it was virtually a foregone conclusion at the December meeting. For the continuation of the upward correction of EUR/NOK towards 10.00 is responsible another factor that has so far added wind to the krone's sails. We expect the Norwegian currency to have the peaks of its strength behind it but still remain strong and attractive.

There was no change of mindset at the OPEC+ meeting. The cartel and its allies are sticking to their plan to raise output by 400,000 barrels each month until the end of 2022. Calls from the White House for a quicker return of production to pre-pandemic levels to reduce the risk of an energy crisis, remove additional weight from the global economy and help reduce inflationary risks went unanswered. The US administration issued a statement announcing that it would invoke all possible tools to defuse energy market tensions and protect economic growth. The reaction is clearly falling oil prices. On the London exchange, the price of a barrel is falling towards 80 USD and is more than 7% below its recent multi-year high.