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SystematicEdge October 2021 FX Commentary

October 5, 2021

Click here to read the full SystematicEdge October 2021 Monthly FX Commentary for more information about currency drivers and their trends set by fundamental economic data.

Economic headwinds ahead of Q4

Financial stress in China: Evergrande’s partial default on its US$90bn debt and the ongoing regulatory tightening on the Tech and Education sectors have temporarily scared foreign investors away from Chinese assets.
Commodity price surge: Oil prices rose 10% in September and 55% in 2021 while natural gas prices doubled in 2021.
US massive spending plans: President Biden’s stimulus package and the deterioration of the US trade balance are exerting long-term downward pressure on the US dollar.
Temporary pause in the USD secular bearish trend: The USD rose in September and in 2021 against most major and emerging market currencies (e.g. EUR, GBP, JPY, and BRL), with the exception of the RMB as the USDRMB has remained below its 6.50 resistance level over the past months. The USD benefited from its safe-haven status as economic headwinds accumulated ahead of Q4: Evergrande crisis, energy shortage, US debt ceiling stalemate in the Senate, and spread of the Delta variant.

Main scenario

The US dollar seems capped: the price action configuration shows that the USD is stuck close to major resistance levels and may resume its bearish trend once market anxiety decreases (EURUSD resistance: 1.16, USDRMB resistance: 6.50).

Risks

Depending on US growth and inflation levels, if the Fed reduces its bond purchasing program faster than initially expected or announces a more aggressive rate hike plan than the +0.25% anticipated for end-2022 at the November meeting (Fed funds rate at 0.08% currently), the 10-year US Treasury yield will likely surge. As a result, the greenback would appreciate against major currencies like EUR, RMB, JPY, and GBP.

Click here to read the full SystematicEdge October 2021 Monthly FX Commentary for more information about currency drivers and their trends set by fundamental economic data.