Week Ahead: November 1, 2021

 
In the week ahead, we have plenty of macro events to look forward to, and it should make for an interesting week.

US ISM manufacturing (Monday), RBA policy decision (Tuesday) and New Zealand jobs data (Wednesday) will dominate the macro calendar in the first half ahead of more important events in the second half of the week – including the FOMC’s policy decision, OPEC+ meeting and jobs data from both North American nations.
 

 
The Fed’s eagerly-anticipated meeting is going to be very important for the financial markets on Wednesday. My base case scenario is that the FOMC will announce that QE will be reduced, with the tapering of purchases to begin in December. The pace of the monthly reduction could be $10B in Treasury securities and $5 billion in MBS every month until the asset purchases program is completed by the middle of 2022. At this pace, the Fed's balance sheet could be slightly above $9 trillion by mid-2022, up from $8.5 trillion.

It is worth noting that the Fed’s plan to taper QE has been well documented and as such it won’t come as a major shock. That is unless the Fed is either too aggressive or very relaxed with tapering. If the Fed is more aggressive in tapering, this would be negative for stocks and positive for the dollar. If the Fed is a bit more relaxed with tapering than expected, then this should be positive for stocks and gold, and probably negative for the dollar.

There’s also the issue of the first rate increase. Like the ECB attempted on Thursday, Fed Chair Jerome Powell will probably let the market know that the bar for increasing short-term interest rates is much higher than some people expect. The Fed will still want to see further progress on the employment front before tightening monetary policy.
 

The big oil price rally has stalled a little, with investors wary of the upcoming the OPEC+ meeting on Thursday. The group has so far refused to act despite a severe power crunch in Europe and repeated calls for higher oil output from India and several other oil importing nations. Will the OPEC+ raise output by 400K barrels per day as per previous agreement, or will the group do more this time? One option that they could opt for is to raise output by 800K bpd this time, in order to reduce the immediate risks of any supply shortages and to ease the pressure on prices, but then don’t raise output at all in the next meeting.  Any deviation from the current policy should move oil prices sharply.

The US jobs report will be published after the Fed meeting is out of the way on Wednesday, potentially making it less important as the US central bank will have probably already announced tapering. However, if the Fed surprises by delaying its tapering plans until next month, then the jobs report will carry more significance. In an event, economists are expecting to see a pickup in the pace of hiring with expectations centred around 385K, up sharply from 194K the month before. But with the previous two jobs reports having disappointed badly on the headline front, will the economy score a hattrick of own goals by recording another underwhelming jobs growth?
 

 
While the European Central Bank and the Bank of Japan both remained among the doves, the week’s winner was clearly the Bank of Canada in terms of market impact. It is fair to say the North American central bank surprised even the most hawkish of analysts on Wednesday. Most economists were expecting the BOC to taper QE by half, because of rising oil prices and after the publication of stronger-than-expected data ranging from jobs to retail sales and CPI. But not many seem to have expected a full stop to bond buying. Well, that’s exactly what the BOC announced, adding that it will also accelerate the potential timing of future interest rate increases because of worries that supply disruptions are driving up inflation faster than expected. Instead, the BOC will now only reinvest its existing balance sheet – meaning that it will be purchasing Canadian government bonds solely to replace maturing ones, thus keeping its overall holdings and stimulus constant. So, while clearly it is as hawkish as they could be, the fact that its huge balance sheet won’t be shrinking means policy will remain loose for potentially years to come. But on a relative basis, Wednesday’s decision will put the BOC among the upper end of the hawkish league table.

Whether the Canadian dollar will continue to outperform will now depend on incoming macro data from the North American nation, as well as the direction of oil prices. In the week ahead, we have both the OPEC+ decision and Canadian employment report. Employment data in Canada have beaten expectations in 3 out of the past 4 months. The last two months saw jobs growth of 90,200 and 157,100 respectively, easily surpassing expectations. 

If the trend continues, we will favour looking for long CAD positions against some of the weaker currencies like the Japanese yen and euro. The CAD/JPY should remain fundamentally supported in a risk-on market environment, while the EUR/CAD could be sold on any short-term spikes.  Currently, both of these pairs are seeing some profit-taking. But for as long as risk appetite remains strong, expect the existing trends in these pairs to resume.