Economics and FICC Strategy

MONTHLY FX OUTLOOK
November 10, 2021

USD still the king of currencies

Currency What’s changed
USD With the Fed's QE tapering expected to end in mid-2022, rate hikes will quickly commence, and markets should start to price in more from the Fed post-2022,
helping the dollar to maintain its dominance.
CAD Markets have overpriced BoC action in 2022, and underestimated the Fed post-2022. A recalibration will leave the CAD out of favor with investors.
EUR Euro depreciation is expected ahead as the Fed outguns the ECB on both tapering bond purchases and raising rates.
GBP Softer consumption backdrop amid the April tax hike to weigh on Sterling, compounded by trade friction risks with the EU.
JPY With no end in sight to easy BoJ monetary policy, and yield curve control extended, look for yen weakness ahead.
Commodity FX Monetary policy normalisation and the promise of more to come should support gains in NZD and AUD in 2022.
LATAM FX An aggressive tightening cycle has begun in the region; Mexico should remain the outlier by hiking rates at a pace of 25bps in this year's remaining meetings.
FX Asia PBoC maintaining pro-active monetary policy through managing liquidity conditions and demand for Chinese bonds, supporting CNY and CNH outperformance.

Currency outlook
End of period: Nov 10/21 Q4 21 Q1 22 Q2 22 Q3 22 Q4 22 Q2 23 Q4 23
USD / CAD 1.24 1.24 1.28 1.29 1.30 1.30 1.31 1.32
EUR / USD 1.15 1.14 1.13 1.11 1.10 1.10 1.12 1.15
USD / JPY 114 114 115 116 115 114 112 110
GBP / USD 1.35 1.33 1.33 1.31 1.31 1.32 1.34 1.36
USD / CHF 0.92 0.94 0.96 0.98 1.00 1.00 0.99 0.99
USD / SEK 8.67 8.64 8.63 8.69 8.68 8.59 8.53 8.39
AUD / USD 0.74 0.73 0.74 0.74 0.75 0.75 0.77 0.79
NZD / USD 0.71 0.72 0.73 0.73 0.74 0.74 0.75 0.77
USD / NOK 8.60 8.55 8.54 8.65 8.68 8.64 8.39 8.13
USD / ZAR 15.36 15.45 15.75 15.50 15.25 15.00 14.50 14.00
USD / BRL 5.48 5.60 5.70 5.70 6.00 5.70 5.70 5.30
USD / MXN 20.5 20.5 20.3 20.0 20.0 20.5 21.5 21.5
USD / COP 3877 3700 3900 3800 3600 3500 3600 3800
USD / CLP 792 810 780 760 720 740 760 780
USD / CNY 6.39 6.35 6.30 6.25 6.20 6.15 6.00 5.90
USD / KRW 1181 1165 1150 1140 1130 1120 1110 1100
USD / INR 74.4 73.5 73.2 73.0 72.9 72.7 72.5 72.2
USD / SGD 1.35 1.34 1.33 1.33 1.32 1.32 1.31 1.30
USD / TWD 27.8 27.5 27.2 26.9 26.8 26.8 26.6 26.5
USD / MYR 4.15 4.15 4.10 4.05 4.00 3.95 3.80 3.65
USD / IDR 14253 14250 14200 14150 14050 14000 13850 13800
Other crosses
End of period: Nov 10/21 Q4 21 Q1 22 Q2 22 Q3 22 Q4 22 Q2 23 Q4 23
CADJPY 91.6 91.9 89.8 89.9 88.5 87.7 85.5 83.3
AUDCAD 0.92 0.91 0.94 0.95 0.98 0.98 1.01 1.04
GBPCAD 1.68 1.65 1.70 1.69 1.70 1.72 1.76 1.80
EURCAD 1.43 1.41 1.45 1.43 1.43 1.43 1.47 1.52
EURJPY 131 130 130 129 127 125 125 127
EURGBP 0.85 0.86 0.85 0.85 0.84 0.83 0.84 0.85
EURCHF 1.06 1.07 1.08 1.09 1.10 1.10 1.11 1.14
EURSEK 9.98 9.85 9.75 9.65 9.55 9.45 9.55 9.65
EURNOK 9.91 9.75 9.65 9.60 9.55 9.50 9.40 9.35

Key indicators – Latest data point

End of period: Quarterly real GDP (y/y %) CPI (y/y %) Current acct (% of GDP) Central bank rate (%)
US 4.9 6.2 -3.4 0.125
Canada 12.7 4.4 0.6 0.250
Eurozone 3.7 3.4 3.1 0.000
Japan 7.6 0.2 3.9 -0.100
UK 23.6 3.1 -2.3 0.100
Switzerland 7.7 1.2 3.0 -0.750
Sweden 9.7 2.5 5.8 0.000
Australia 9.6 3.0 3.3 0.100
New Zealand 17.0 4.9 -1.8 0.500
Norway 6.1 4.1 9.9 0.250
South Africa 19.3 5.0 4.6 3.500
Brazil 12.4 10.2 -1.3 7.750
Mexico 19.6 6.0 3.0 4.750
Colombia 17.6 4.5 -4.6 2.500
Chile 18.1 5.3 -1.1 2.750
China 4.9 0.7 1.9 3.850
South Korea 4.0 3.2 5.7 0.750
India 20.1 4.3 0.4 4.000
Singapore 6.5 2.5 18.8 n/a
Taiwan 3.8 2.6 15.1 1.125
Malaysia 16.1 2.2 4.8 1.750
Indonesia 3.5 1.7 -0.1 3.500

FX Monthly | 2
 Chart 1: Markets too optimistic on BoC hikes in 2022-23 (l);
CAD not pricing in enough from the Fed post-2022 (r)

Katherine Judge and Avery Shenfeld

Tempering of market BoC optimism to unravel

CAD gains
Q4 2021: 1.24 | Q1 2022: 1.28 (USDCAD)
While the loonie had been strengthening as the market
pulled forward expectations for Bank of Canada
tightening, it was oddly quiet when rates took a further
jump on a hawkish BoC statement and policy report. The
reaction in the rates market may have reflected one-
sided positioning, as 2-year yields subsequently retraced
much of that jump. With the BoC redefining the output
gap to exclude capacity temporary offline due to supply Source: Bloomberg, CIBC
chain and other disruptions, we pulled forward our
forecast for BoC tightening, and we now see the Bank
raising rates starting in Q3 2022, with an additional USD
25bps hike in Q4, and 75bps of hikes in 2023. Bipan Rai
But that remains well below what the market has priced
in (Chart 1). The BoC already looks too optimistic in its Green light for the greenback as Fed enters
growth forecast, with monthly GDP data pointing to a Q3 steep tapering cycle
result well below the Bank's 5.5% projection. The Bank's
Q4 2021: 95.3 | Q1 2022: 96.3 (DXY)
own research has pointed to the heavy level of
household debt in Canada as a reason why the On a trade-weighted basis, the USD has been
economy will be more sensitive to rising rates. consolidating over the past month. We’re still
constructive over the coming year, and there are a few
With the US seeing more wage and price inflation, and important themes to keep tabs on in the period ahead.
ahead of Canada in its GDP recovery, we have the Fed
hiking a bit more than the BoC (150bps in total) over The great ‘repricing’ of central banks in the short rates
2022-23. Both wage and price inflation trends have been space has made relatively little waves in the broad USD
hotter south of the border. Canada has outperformed on market. That could be because much of the shift in
the jobs count, but will see increased labour force central bank pricing has been for the smaller DM central
availability as immigration ramps up, and hasn't seen as banks that have benefitted from stronger terms of trade.
much evidence as the US of permanent departures from There hasn’t been as pronounced of a shift for large DM
the workforce. Hiring in Canada could also be impacted central banks – which is where the largest weights are
in the near term by the reduced availability of wage for the USD basket. We’re still circumspect with the
subsidies. Moreover, unlike Canadians, Americans have degree to which the smaller DM central banks are being
much of their mortgage debt locked in for 30 years and priced for next year, and would expect that corrective
are therefore not impacted by a turn in rates. moves there should buttress the USD even more in the
quarters ahead.
We see USDCAD drifting above the 1.30 mark next
year, as it becomes clear that Canada's central bank will Second, the Fed has begun to taper its monthly asset
not be outgunning the Fed, and as oil prices retreat from purchases. Unlike the 2014 edition of its taper, the Fed
recent highs. Softer crude prices and a return to will be reducing its asset purchases on a monthly basis
Canada's usual travel deficit as tourism restarts will instead of whenever it meets. We’re still of the view that
weigh on the country's trade balance, which has been the additional supply for the market will lead to higher
supportive for the loonie in recent quarters. nominal yields in the long-end and further support the
USD.

Third, extant positioning in the FX market still implies

that the USD is already the favoured long. Unlike the first
two themes, this represents a risk to our view in the near
term. Nonetheless, positioning in the FX market is
generally a tactical theme and we’d still view any USD
weakness as an opportunity to layer into opportunistic
hedges, especially for those that are adversely impacted
by a stronger USD over the long term.
FX Monthly | 3
EUR JPY
Jeremy Stretch Jeremy Stretch

Laggard ECB to dampen euro sentiment Extended easy BoJ monetary policy suggests
Q4 2021: 1.14 | Q1 2022: 1.13 (EURUSD) weaker yen ahead
The 16 December ECB meeting is likely to prove pivotal Q4 2021: 114 | Q1 2022: 115 (USDJPY)
to the EUR’s 2022 trajectory. The meeting is While the RBA recently moved away from yield curve
accompanied by updated forecasts, including inflation control, it seems unlikely that the BoJ is set to follow suit
(HICP), out to 2024 for the first time. Headline inflation is anytime soon. Following a meeting between BoJ
running at levels not seen in more than a decade, and Governor Kuroda and PM Kishida, post the recent LDP
the hawks on the committee, led by the soon to depart election victory, the former acknowledged that not only
Bundesbank President Weidmann, continue to detail that does the bank remain committed to its 2% CPI target, it
"upside risks predominate". But the main protagonists also will maintain YCC, even beyond Covid. The
on the ECB Governing Council, led by President perpetuation of an ultra-easy BoJ policy stance is set to
Lagarde, continue to view these price pressures as leave Japan alongside the eurozone and Switzerland as
largely transitory. Lagarde has suggested that the ECB extending long term policy inertia, a scenario which
should "not overreact to supply shortages or rising should continue to leave the JPY on the defensive.
energy prices". The view that core prices will be
relatively well behaved will help maintain medium run Post the re-election of the LDP, we can expect another
ECB policy inertia. round of fiscal stimulus. Press reports suggest a
potential injection of around JPY35trn, which could even
The ECB has indicated that the existing emergency include cash handouts to youths and children. While we
bond buying programme will remain in place until the expect Q3 weakness to give way to a solid rebound in
pandemic emergency is over. As the process has a clear Q4 GDP as the economy re-opens, the extension of
timeline, March 2022, and overall purchase envelope, yield curve control will see a sizeable widening in UST-
€1850bn, expect PEPP balance sheet expansion to JGB 10 year spreads, providing the rationale for ongoing
conclude in line with that timetable. However, ECB outflows of capital looking for higher returns overseas.
apprehension over the maintenance of favourable
financing conditions, and concerns over peripheral Admittedly, one risk to our weaker yen scenario that
spread widening, point towards the ECB utilising the bears watching is the sheer scale of existing JPY shorts.
Asset Purchase Programme to maintain bond purchases Speculative investors have continued to add to those
into 2023. positions over recent weeks, and leveraged shorts are
threating extremes not seen since December 2018. The
While hawks and doves will debate the medium term scale of the position skew risks a JPY corrective rally
assumptions, we expect them to maintain bond should risk sentiment prove to become materially
purchases well beyond the end of next year. In view of compromised into year-end, but we would still maintain
the ECB sequencing assumptions, that would leave our medium term outlook for a weaker yen into 2022.
rates on hold well into 2023, in contrast to the US. That
policy gap underscores why we continue to favour EUR
underperformance versus the USD, and look for
EUR/USD retreating towards 1.10 in 2022.
GBP
Jeremy Stretch

Soft macro backdrop to weigh on Sterling

Q4 2021: 1.33 | Q1 2022: 1.33 (GBPUSD)
UK interest rate volatility has exploded over recent
weeks as the market reacted to increasingly vigorous
warnings from BoE members regarding the prospect of
early rate hikes. Going into the November MPC decision,
the market had not only priced in more than 15bps of
tightening, reversing the March 2020 emergency rate
cut, but it also had priced in a total of 125bps of hikes by
the end of 2022. The market paid insufficient attention to
BoE Governor Bailey's warnings that "we will have to
act" were loaded up with caveats, namely such action

FX Monthly | 4
would require "medium-term inflation and medium-term 2018 cyclical high at 1.2% in October, prices looks set to
inflation expectations" to be at risk. accelerate further in the near term. But if as we expect,
inflation remains below target over the medium term, the
A by-product of the market ramping up rate hike tolerance for a stronger CHF might not prove long
expectations proved to be a correction in speculative lasting. Hence we expect USD/CHF to reverse the early
Sterling positioning. Leveraged players pared shorts Q4 correction.
from 10-month highs while real money investors moved
back net long of Sterling, with holdings reaching three-
month highs. But the risk of pre-emptive monetary
tightening compromising UK recovery dynamics has SEK
proved to weigh upon trade-weighted Sterling.
Jeremy Stretch
The BoE failed to pull the rate trigger in November, in
line with our pre-meeting call. We expect rates to be Riksbank tightening expectations to support
hiked by 15bps in February, reversing the March 2020
emergency cut. However, we expect the BoE to be more SEK momentum
circumspect in 2022 than what is still assumed by the Q4 2021: 9.85 | Q1 2022: 9.75 (EURSEK)
market, which is pricing in 95bps of hikes in the next 12
months. The SEK has proven to be a material outperformer over
the last month. The catalyst has been a material
A slowing macro environment and relatively contained reassessment of interest rate expectations. From pricing
inflation expectations points towards a less aggressive rates remaining on hold as recently as three months
rate cycle. Rising prices risk disposable incomes being ago, the market has now moved to price in almost 40bps
compromised prior to an already announced tax hike. of tightening in the course of the next 12 months.
That combination points to consumption headwinds
which will compromise the real economy. The risk of Although the economic surprise index has eased from
advancing UK/EU trade frictions also points towards near six-month highs, the economic tendency survey
increasing GBP headwinds into early 2022. As a remains near record highs, and Q3 GDP materially beat
consequence, we have revised down our Sterling expectations. Forward looking sentiment, in terms of the
outlook. PMI indices, remains supportive. Indeed, the
compositive PMI has only dipped below 65 once in the
last seven months, suggesting that macro activity looks
set to remain firm.
CHF Of course, as a small open economy, there are concerns
Jeremy Stretch in relation to any spillover effects from global supply
chain disruptions. Although the manufacturing PMI
moderated in October, the underlying dynamics,
SNB Monetary policy accommodation behind including exports and domestic orders, remained
expected CHF weakness ahead constructive, while the delivery times component eased
from September extremes. Despite the Riksbank
Q4 2021: 1.07 | Q1 2022: 1.08 (EURCHF)
business survey warning about the impact of supply side
The modest increase in Swiss sight deposits in the first disruptions, manufacturing sentiment rebounded in the
week of the month, despite the fact that EUR/CHF October economic tendency survey.
traded to new fresh post-pandemic lows, points towards
the SNB being relatively reluctant to push back against The Swedish CPI is now expected to remain above 2%
near-term CHF gains, not least as the EUR continues to in 2022, up from previous median assumptions of prices
be undermined by the prospect of ongoing dovishness. at 1.6%. That will help validate the need for the Riksbank
But that has not stopped real money investors from to act soon, supporting additional SEK gains. A final
extending net CHF shorts over recent weeks. Indeed, justification for action comes via ongoing real estate
after moving net short of the CHF in mid-September, for concerns. With home price growth remining in excess of
the first time since March 2020, the overall short CHF 10%, the central bank will remain mindful of rising
skew has extended to levels not seen since December financial sector imbalances, underlining the need for a
2019. modest tightening bias, and supporting further SEK
gains.
Although sight deposits are not a complete measure of
central bank intervention, it does appear that the central
bank is more hesitant about stemming near-term CHF
gains. It might be welcoming some appreciation given
that its impact on import prices could lean against the
recent uptrend in the CPI. Having already reached the

FX Monthly | 5
Commodity FX employment and thus wage growth and consumer price
inflation, would take considerably longer. A higher than
NOK expected print for 3Q CPI saw the market bring forward
an expected first rate hike into 2022, against the RBA
Jeremy Stretch guidance of 2024. We expect the first hike in 1Q 2023.

NOK gains to continue in line with Norges Although RBA conceded the higher CPI result, removed
Bank tightening specific date guidance, and ended yield curve control of
the April 2024 bond, they pushed back expectations of
Q4 2021: 9.75 | Q1 2022: 9.65 (EURNOK) an earlier rate rise. AUD gains through October were
The NOK has proved the top performing major versus pared at the time and we now expect they should track
the US and EUR over the last 3m and 12m. Key to the the economic data out of the lockdowns in the coming
outperformance has been the combination of a weeks. The next key data is 3Q wage data on November
constructive fiscal outlook, robust recovery dynamics 17th.
which have encouraged monetary tightening, and oil
price gains. In terms of the latter, the one month For AUD overall, that the RBA will be one of the later
correlation between Brent Crude and the NOK remains major central banks to tighten, need not be a dramatic
close to decade level highs. weight on the currency, so long as the economy is
recovering with low-inflation activity.
The rebound in macro activity prompted the Norges
Bank to become the first major developed market central Previous concerns over tensions between China and
bank to hike when they took rates to 0.25% in Australia have not gone away, but trade numbers out of
September. Although the bank passed up the both economies show that Chinese demand for industrial
opportunity to tighten further at its November meeting, commodities continues and that Australia remains its
that was very much expected. We look for another major source.
25bps tightening to come at the 16 December meeting,
in line with the updated Monetary Policy Report.

While the macro rebound and uptick in the oil sector are NZD
seen to justify policy action, the obvious differential
between the Norges Bank and most other major central Patrick Bennett
banks is that the tightening cycle is framed by an
inflation profile which is set to remain below target over Expectation of RBNZ hikes provides support
the forecast horizon. Our global base case also has
crude oil prices reversing some of its gains in 2022, Q4 2021: 0.72 | Q1 2022: 0.73 (NZDUSD)
which could have the central bank pushing back a bit on As the RBNZ began the process of policy normalisation,
the degree of tightening ahead. Although we continue to hiking the cash rate 25bps in October, the NZD
expect NOK gains versus the EUR, they are set to be consolidated what had already been a strong
less aggressive in the next 12 months compared to the performance amongst major currencies since the middle
last. of the year.
With the RBNZ to hike again this month and continue
that process next year, and the cash rate expected to
AUD reach 1.50% from the current 0.50%, we expect rate
Patrick Bennett differential support for the NZD to show via appreciation
on a number of crosses.
AUD: Mixing its performance We recommend being buyers of weakness in NZD vs
AUD, EUR and JPY. Key driver for moves will be the
Q4 2021: 0.73 | Q1 2022: 0.74 (AUDUSD) divergence in monetary policy, both actual and outlooks.
Over the last month, AUD has gained against the We exclude trades vs the USD at this point as the Fed is
funding currencies of JPY and EUR, and is also firmer closer than the others mentioned to normalisation. Still,
against the USD, although it has lost ground to the NZD, we also highlight moderate support for NZD/USD down
as rate differentials have widened. In the coming month, to 0.7000, which was the area of previous highs. More
we expect flat to positive AUD performance against the major support will be found ahead of 0.6800-0.6850.
USD as the economy recovers from lockdowns, and for The transmission mechanism from higher rates to the
underperformance against the NZD to extend. currency is not always straightforward. All else equal, if
activity was not also picking up, higher cash rates would
The RBA view for some time has been that economic be a headwind to asset prices and the currency. In the
recovery from lockdowns would be swift. Though the case of the New Zealand, activity has been strong and is
bank was also firm in its view that a return to full expected to remain so. That has been underpinned to-
FX Monthly | 6
date by fiscal and monetary support, and through strong LATAM FX
external demand that has lifted the terms-of-trade to a
record. MXN
Luis Hurtado

ZAR Banxico likely to remain the regional outlier

Jeremy Stretch Q4 2021: 20.5 | Q1 2022: 20.3 (USDMXN)
The TIIE curve endured a 10bps average drop in the
ZAR sentiment challenged by stagflation 3M-1Y range following the Fed and the weaker
dynamics economic activity numbers last week. Although a
welcome adjustment, we believe short-terms are not
Q4 2021: 15.45 | Q1 2022: 15.75 (USDZAR) incorporating the non-negligible odds of a rate pause in
After a brief flirtation below the 13.50 threshold into the the hiking cycle in 2022. The market is still pricing over
end of H1, the ZAR has been the second worst 100bps in rate increases for the next three months and
performing global currency thus far in H2, as only the over 250bps in the one year range. Such a trajectory
BRL has witnessed a greater degree of depreciation. implies not only continuous rate increases for the next
That has developed as international investors have eight meetings, but also an acceleration of the tightening
largely abandoned domestic bonds. The three-month cycle in the near future. We find it difficult to believe that
moving average of foreign bond purchases has dipped outcome will be achieved given the division among the
to all-time lows, beyond 2020 extremes. While board, Arturo Herrera (AMLO’s 4th nominee at the
international investors have steered away from domestic board) replacing Alejando Diaz de Leon in January, and
bonds, speculative ZAR holdings were reduced by the negative surprises in recent economic activity
around two thirds over the same period. numbers.

The reduction in appetite for South African paper comes We expect Banxico to increase the overnight rate by
as real yields continue to be compromised. Rising only 25 bps this week, and by another 25bps in
domestic inflationary influences point towards real yields December, leaving the door open for a potential pause in
continuing to compress. Having peaked above 6% in Q1, 2022 H1. Looking at the peso, we favour long USD/MXN
they are set to dip below 4%, as CPI looks set to positions at 20.30 with a 20.80 target and a 20.10 stop
advance from September’s 5.0% amidst ongoing food loss.
and energy price gains.

Having moved beyond the mid-point of the 3-6% SARB

target range in August, prices risk threatening the top of BRL
the price corridor into year-end. The recent ZAR
depreciation will exacerbate the jump in the global oil Luis Hurtado
price, as WTI has gained almost 30% in local currency
terms across the period. While inflation expectations Fiscal risks support aggressive tightening cycle
have yet to become materially de-anchored, signs of an
uptick in wage deals, as the metalworkers union agreed Q4 2021: 5.60 | Q1 2022: 5.70 (USDBRL)
to a 5-6% hike, point towards the need for central bank The constitutional amendment that limits annual
action to restrain inflationary pressures. While a rate hike payments of court-ordered debts resumes discussion in
at the November meeting is likely to be a close call, the congress this week. We expect headline volatility to
prospect of at least 75bps of tightening in the next 12 resurface as some parties that favoured the proposal in
months risks materially compromising the growth the first round are showing signs of a change in position,
trajectory, adding to near-term ZAR headwinds. Hence creating uncertainties in the Lower House and the
we expect a re-test of 2021 highs in the next six months. Senate. A defeat by the government could push the
Bolsonaro administration to implement creative ways of
financing its social aid program next year.

Remember that the main impact on markets comes from

the reputational hit to the government from breaching a
rule that was designed to ensure fiscal austerity after
several years of a spending spree on the part of
previous governments. Moreover, with the onset of the
general election cycle, this situation could set a
precedent, opening the door for other expenses outside
the spending cap.

FX Monthly | 7
On the monetary policy front, the BCB has already do not expect a significant downward trend in USD/COP,
entered into damage control mode, increasing the Selic as the electoral cycle will contaminate market
rate by 150bps in October and signalling a similar hike in expectations going forward. Hence, we have revised our
the last meeting of the year. Hence, we expect the Selic previous USD/COP year-end target to 3700 from the
rate to end the year at 9.25% and to reach 11.25% by previous 3600.
the end of Q1 2022, and we revised our year end
USD/BRL forecast to 5.60 from the previous 5.30.
Asia FX
CLP CNY
Patrick Bennett
Luis Hurtado
Appreciation continues at steady but modest
BCCh to increase overnight rate by at least
pace
125bps in December
Q4 2021: 6.35 | Q1 2022: 6.30 (USDCNY)
Q4 2021: 810 | Q1 2022: 780 (USDCLP)
The current economic and fundamental landscape in
Chilean assets recovered some ground last week as a
China throws up any number of concerns or cautionary
far-right wing candidate gained significant traction,
flags. They include slowing economic momentum,
overtaking Sebastian Sichel’s second place in the polls
energy supply issues and curbs on electricity usage,
and even challenging leftist Gabriel Boric's lead ahead of
China Evergrande and property concerns more
the November 21st presidential election. The senate is
generally, geo-political concerns, and lingering trade
still set to vote on the pension withdrawal bill amid some
tensions.
opposition members stating they will not back the law.
However, we still maintain a high level of caution as a Witnessing the hitherto stability of USD/CNH, and
the vote remains a close call. recently a renewed push lower in the market, fairly
prompts question as to whether the strength of the CNH
On the monetary policy front, October headline inflation vs the USD – and it is even stronger on trade-weighted
increased to 6.0% y/y (vs 5.3% y/y in September), 0.4 measures, can be validated. We believe it can.
percentage points about market consensus. Core prices
Following a sustained downtrend in USD/CNH from May
showed a similar trend, jumping to 5.06% from the
to December of last year, spot has settled inside a range
previous 4.38% y/y. With robust household consumption
of 6.3500-6.6600. A corrective rebound off lows of
expected to continue in the short term and discussions
6.3525 in late May, reached 6.5287 in July, before
about another round of pension funds withdrawal
subsequently breaking below 6.4198 in mid-October.
ongoing in congress, we expect the BCCh to maintain its
The significance of the 6.4198 break is that it marked a
current pace of rate increases, and hike the overnight
61.8% retracement of the corrective rebound. Below that
rate by at least 125bps in December.
level, from a technical perspective, suggests the major
downtrend has resumed.

COP Present levels of USD/CNH are somewhat in line with a

long-held relationship between USD/CNH and the
Luis Hurtado spread between China and US 10-yr. yields.
Investor demand for Chinese bonds has been strong
Banrep accelerates tightening cycle over the last months and is a long-term currency
support. That will only increase, albeit subject to
Q4 2021: 3700 | Q1 2022: 3900 (USDCOP)
hedging, when Chinse bonds are included in global
Banrep increased the overnight rate by 50bps to 2.50%, indices from this month. Estimates are of around
25bps more than expected by consensus, but in line with $130bln of demand over the 36 months to October 2024,
our forecast. Banrep once again left the door open for which is the end of the initial inclusion period.
further rate increases as inflationary pressures remain in
In light of USD/CNH stability and with the USD stronger
place and both core and headline inflation are above
against a number of other major currencies, the trade-
target. Moreover, the central bank revised its GDP
weighted value of the Chinese currency has appreciated.
growth and inflation forecasts significantly higher.
It is around 5% stronger ytd versus a 2% gain vs the
Hence, we now expect the year-end overnight rate to
USD.
land at 3.00%.
A significant development is related to higher commodity
Looking at USD/COP, with Banrep confirming an prices generally, and energy import costs more
acceleration of the tightening cycle, we maintain our bias specifically. Even as commodity prices have increased;
towards selling USD/COP spikes at 3900. However, since June, Chinese imports in CNY terms have
despite the decisively hawkish rate announcement, we expanded at a slower pace. While there may be supply
FX Monthly | 8
issues at play, we suggest that the stronger currency,
both trade-weighted and vs the USD is helping to reduce
the import bill. Potential downstream damping of
domestic prices pressure will also be welcome.
China runs a strong trade and current account surplus.
Our view on trade is that China’s export competitiveness
has rarely been about the exchange rate, and more
about its cost of labour advantage, and via other
channels, many addressed by US trade hawkishness. In
light of higher import costs, and despite Chinese policy
makers saying earlier this year that the currency would
not be used to dampen the domestic impact, perhaps a
shift has taken place. That would be one which provides
validation to CNH appreciation now, and for gains to
continue so long as global input prices remain elevated.

FX Monthly | 9
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FX Monthly | 10
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FX Monthly | 11