Commodity currencies at multi-month highs, sterling firm on BoE rate hike bets

October 21, 2021: Commodity currencies stood near multi-month highs on Thursday on strong raw material prices, while the improved mood chipped away at demand for the safe-haven U.S. dollar, which has recently been supported by expectations of Federal Reserve tapering.

Sterling was also riding high on firming perceptions the Bank of England (BoE) will raise interest rates as soon as next month to curb inflation, despite softer-than-expected UK price data on Wednesday.

"It looks almost certain that the BoE will raise interest rates in November, perhaps again in December, as inflation could get out of control otherwise given a severe labour shortage," said Yukio Ishizuki, senior strategist at Daiwa Securities.

"And globally we are likely to see rate hikes to curb inflation in many countries, which means the U.S. dollar is standing out less than before, in terms of rate hike expectations."

The dollar's index dipped 0.10% to 93.514, holding barely above Tuesday's three-week low of 93.501. It has declined 1.1% from a 15-month peak hit last week. Expectations that the Fed could soon scale back pandemic-era stimulus have underpinned the dollar over the past few months.

Commodity currencies led gains against the dollar as oil prices hit their highest levels in many years.

The Canadian dollar rose about 0.2% to C$1.2295 per U.S. dollar, hitting a high last seen in late June, also thanks to higher-than-expected Canadian inflation data.

The Australian dollar also extended its bull run to hit a 3-1/2-month high of $0.7545 while the New Zealand dollar hit a four-month peak of $0.7212.

"Given the massive rise in commodity prices, commodity-linked currencies will enjoy a tailwind," said Teppei Ino, senior currency strategist at MUFG Bank.

Oil prices have been supported by strong demand as countries started to reopen their economies, while a global coal and gas crunch showed little sign of abating. U.S. crude and fuel inventories have tightened sharply. [O/R]

Brent crude futures hit its highest level since 2018, while U.S. crude futures were at their loftiest level since 2014.

The British pound stood at $1.3828, just shy of its Tuesday peak of $1.3834, its highest level in over a month.

Against the euro, sterling was near its highest levels since February 2020, at 84.26 pence per euro.

The UK currency held momentum due to rising expectations of a BoE rate hike.

British overnight indexed swaps are pricing in about 80% chance of a 0.25% rate hike on Nov. 4.

"It's as if the BoE is stealing the spotlight from the Fed as it looks likely to raise rates before the Fed," said Kyosuke Suzuki, president of Financial algotech company at Ryobi Systems.

"What could be the game-changer, though, is if the Fed is also jumping on the bandwagon of global rate hikes much sooner than expected," he added.

The Federal Reserve is widely expected to announce a tapering of its bond purchase at a policy meeting in early November, but it is expected to distance itself from future rate hikes for now.

Money markets are pricing in one U.S. rate hike in 2022 after the Fed is expected to have finished its tapering process in the middle of next year.

The euro held firm at $1.1664, staying close to Tuesday's three-week peak of $1.1670.

The positive risk mood weighed on the Japanese yen, often perceived as a safe-haven currency.

The dollar stood at 114.39 yen, near Wednesday's four-year high of 114.695 yen.

The yen is dented by expectations that its trade deficit could widen as rising oil prices boost its imports bill while its car exports are hampered by chips shortages.

In cryptocurrencies, bitcoin slipped 1.8% to $64,789, after having hit a record high of $67,016 the previous day.

Ether climbed 0.7% to $4,194, edging near its record peak of $4,380 hit in May.

Reuters