ECB cheat sheet: Wake up, this isn’t the Fed!

ECB cheat sheet: Wake up, this isn’t the Fed!

ING Economics ING Economics 30.01.2023 10:14
A 50bp hike by the European Central Bank, and a repeat of its December guidance, are set in stone but a pushback against subsequent cut expectations will move 5Y euro rates higher Source: ING Front-end pricing talk but it's a red herring Much has been said and written about the next two ECB meetings’ rate hikes. The upshot is, as our colleagues highlight, the ECB still has a licence to hike, and a 50bp increase is pretty much set in stone this week. In all likelihood, guidance for a 50bp March hike will be repeated too but the March meeting will also feature a new set of forecasts that should heavily influence the ECB’s decision. As a result, markets will be tempted to rely more on their anticipation of how the ECB staff forecast will evolve at that meeting, rather than on president Christine Lagarde’s guidance. In all likelihood, guidance for a 50bp March hike will be repeated As our economics team noted in their preview, "If everything else remains the same as it was in December, the ECB’s headline [March] inflation projections could easily be lowered by 0.3 to 0.5 percentage points for 2024 and 2025". Cut-off for the FX, rates, and energy market prices is a little under one month away but, as things stand, this would imply 2025 inflation at 1.8%, under the ECB’s 2% target. Worse, this would be premised on a curve that implies 80bp of cuts between the mid-2023 rate peak and end-2024. To cut a long story short, we wouldn’t overstate the importance of the next two meetings for interest rates markets. We now have more hawkish ECB expectations than the market Source: Refinitiv, ING Eyes on the prize, the belly's where the battle really is The curve is pricing a rapid decline in rates after they reach their peak in 2023. For a central bank expected to hike at least three more times, this is problematic. Lagarde is sure to be asked about this anomaly. If recent history is any guide, she’ll likely take that opportunity to guide market rates higher. We doubt she’ll manage to completely dis-invert the curve, however. The shape of the euro term structure cannot be seen entirely in isolation and some remnant of easing is likely to persist as long as the Fed is expected to cut more than 200bp by end-2024. But, at least, she should manage to delay cut expectations. The part of the curve most likely to be affected is the 5Y point. We think hike expectations are correctly set for the next few meetings which imply that short-dated bonds and swaps, say up to 2Y, are also correctly priced. Longer tenors, on the other hand, depend on more structural factors such as where investors think the long-term interest rate equilibrium lies. This is not something the ECB will change at this meeting. This leaves the maturity in between, aptly called the belly of the curve, as the sector most at risk of a pushback against cut expectations. What happens to the slope of the curve, for instance 2s10s, depends in greater parts on the tone of the ECB from one meeting to the next. We have a view (it will be hawkish) but given its recent unpredictability, we have a greater conviction on our outright (higher rates) and curvature (5Y rates to rise faster than other maturities) calls.  5Y rates are most at risk if the ECB pushes back against rate cut expectations Source: Refinitiv, ING 'Detailed parameters' on quantitative tightening to come, but the market-moving information is already out The ECB has promised “detailed parameters” for the reduction of its asset purchase programme portfolio. With laying out the headline volumes already at the last meeting, the most market-moving aspects are already known. What we could expect is details about whether the reduction will be proportionate across the different asset classes. Within the public sector specifically, how the ECB will maintain alignment with the capital key distribution across countries. We do not anticipate the ECB to diverge from previous targets here, though we might get information on how special situations will be dealt with. For instance when overall redemptions in a month are below the targeted reduction volumes. A rebalancing towards supranational debt with their larger share of green bonds would make sense Keeping in mind the focus the ECB and Isabel Schnabel in her recent speeches have put on “greening” the central bank’s portfolios, there is a chance that this also translates into more concrete action in the public sector portfolio. A rebalancing towards supranational debt with their larger share of green bonds would make sense, and it would not impact the capital key alignment. It would also address the rising prominence of the European Union as an issuer. We doubt though that such tweaks by themselves will impact the market's currently benign take on sovereign spreads. This time they are more likely to take their cues from the overall tilt of the ECB’s communication. This isn't a litmus test for the euro rally While it’s undeniable that the ECB doubling down on its hawkish rhetoric has contributed to the strengthening of the euro since December, we don’t see this week’s policy meeting as a litmus test for the sustainability of the euro rally. The reasons are two-fold. First, EUR/USD may well return to being predominantly a dollar story this week. A Fed approaching peak rate and facing a worsening economic outlook has more room to surprise on the hawkish side, and we think it could offer a breather to the dollar. In contrast, as discussed above, we would not overstate the importance of the next two ECB meetings for rates. The ECB’s communication hiccups have likely eroded the market's trust in Lagarde’s guidance This leads us to the second reason: the ECB’s communication hiccups have likely eroded the market's trust in Lagarde’s guidance. Only a few hours after the December meeting, the news that many members had preferred 75bp was leaked. And if ECB members aligned behind the 50bp guidance in recent weeks, a probably more debated 50bp move in March may well cause sparse communication again after the February meeting. This – in our view – may lead markets to be more forward-looking than what Lagarde will wish them to be. Ultimately, data may remain a larger driver than Lagarde’s guidance for the euro. If gas prices stay capped and economic surveys keep pointing up, a correction in EUR/USD after a hawkish Fed should not last long. We expect EUR/USD to trade around 1.07-1.10 for most of February. Another big break higher may need to wait for an official pivot by the Fed: we see this materialising in the second quarter, where we forecast a move to 1.15.   Read this article on THINK TagsInterest Rates FX ECB Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
FX Daily: Stress testing the consensus view

FX Daily: Stress testing the consensus view

ING Economics ING Economics 30.01.2023 10:11
The week ahead sees several key event risks for FX markets - largely in the form of central bank meetings in the US, eurozone, and other parts of Europe. Fresh communication from central bankers will stress test investors' view that the peak in tightening cycles is close at hand. A Fed push-back against 2H23 easing expectations could support the dollar USD: Action kicks off tomorrow The dollar starts the weak in very narrow ranges and not far from the lows of the year. This week will stress test the consensus view amongst investors that i) the Federal Reserve will start to acknowledge easing price pressures and soon end its tightening cycle, ii) China reopening will support global growth and iii) that lower energy prices mean improved European growth prospects. Our macroeconomists discuss many of those themes in their week ahead preview, including links to full previews for this week's FOMC, European Central Bank and Bank of England meetings. Our FX contribution to the FOMC preview outlines a scenario where the dollar could sell off and EUR/USD trade over 1.10 were the Fed to hugely surprise by suggesting that any additional hikes, after this week's 25bp increase, would be data dependent. That seems unlikely. More likely is the Fed pushing back against the 50bp of easing priced into the second half of the year and the dollar enjoying a brief rally. In addition to Wednesday's FOMC meeting, the US data calendar contains two important pieces of US data. The first is Tuesday's release of the fourth quarter Employment Cost Indicator (ECI) - one of the Fed's preferred gauges of price pressures in labour markets. This had spiked to 1.4% in the first quarter of last year from the previous three months, but is expected to drop back to 1.1% in the fourth quarter from 1.2% in the third. Any upside surprise here could see expectations swing toward a more hawkish FOMC outcome. And Friday sees the US January jobs report. ING's US economist, James Knightley, sees the headline job creation starting to dip. And assuming there are no upside surprises in the average earnings figures, we assume this data release would continue to support the benign, dollar-bearish environment. Clearly, it is a busy week for FX with arguably most of the volatility coming between the FOMC meeting outcome on Wednesday evening and the ECB/BoE decisions and press conferences on Thursday lunchtime. In the background, this week also sees the reopening of Chinese markets after the Lunar New Year public holiday. Investors are very bullish on China reopening prospects and will need to be fed more supportive data points this week. Here, tomorrow sees the Chinese PMIs for January, where sizable rebounds are expected - and required to support bullish positioning. Our game plan sees the dollar staying supported into Wednesday's FOMC meeting (e.g. DXY holding support down here at 101.30/50), but any FOMC-inspired rally in DXY to the 102.50/103.00 area proving temporary. Chris Turner EUR: Drifting into Wednesday/Thursday As above, Wednesday/Thursday could prove the most volatile period of the week. Our core view for the ECB meeting is that the central bank will stay hawkish and push back against the easing priced in for 2024. That should see two-year EUR:USD swap differentials continue to narrow and be positive for EUR/USD. We had cited this narrowing in swap differentials as a major factor when revising our EUR/USD forecasts substantially higher.  Before Thursday's ECB meeting, today sees the release of January economic confidence readings for the eurozone. These are expected to have improved marginally, but any upside surprises would feed the narrative of lower energy and strong fiscal stimulus ensuring that recessions if seen, are mild.  Expect EUR/USD to drift in a 1.08-1.09 range - probably into the US ECI data release tomorrow. Chris Turner GBP: Bank of England could be supportive As we discuss in the BoE monetary policy preview, a 50bp rate hike could prove mildly supportive for sterling. Our base case of a 50bp hike is not fully priced by the market. And with wage pressures remaining firm and base effects not expected to see CPI rolling substantially lower until the second quarter, it looks too early for the BoE to be sounding the all-clear on inflation. Depending on the state of the dollar after the FOMC meeting, GBP/USD could be pressing 1.2500 by the end of the week. Chris Turner CEE: Czech National Bank to confirm stable rates After a busy two weeks in Poland and Hungary, the main focus will shift to the Czech Republic. But first, today, we will see the final GDP number for Poland for last year. On Tuesday, fourth quarter GDP for the Czech Republic will be released. On Wednesday, we'll see the Czech Republic's state budget for January and PMI numbers across the region. We expect sentiment to improve in Poland, to be unchanged in the Czech Republic, and to deteriorate in Hungary. The Czech National Bank is scheduled to hold its first meeting of the year on Thursday. We expect rates and the FX commitment to remain unchanged. The main focus will be on the central bank's new forecast and outlook for January inflation. Thus, given the risk of higher inflation in the first quarter, we expect the tone to remain unchanged with the Bank citing "higher rates for longer" and warning that it does not "rule out a rate hike at subsequent meetings". However, we expect that rates will remain stable at least until the second quarter. In Hungary, S&P on Friday decided to downgrade the rating by one notch to BBB- with a stable outlook, highlighting the impact on the economy due to Covid-19, the Ukrainian war, and delays in EU money flows. The FX market in the region this week will, of course, be driven mainly by the global story and high volatility will not be a surprise. However, overall global conditions should remain positive for the region. Moreover, gas prices are testing new lows again, which is always good news for CEE. On the local front, we expect the Hungarian forint to absorb the negative shock of the downgrade and move back towards 395 EUR/HUF. In our view, the Czech koruna has the heaviest long positioning at the moment and therefore we see no room for the CNB meeting to support a move lower. On the contrary, we believe the koruna is overvalued and should move back towards 24.0 EUR/CZK. Frantisek Taborsky Read this article on THINK Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
Asia Morning Bites - 30.01.2023

Asia Morning Bites - 30.01.2023

ING Economics ING Economics 30.01.2023 10:08
China markets reopen after the lunar new year holidays. Tech earnings could drive trading direction ahead of major central bank meetings later this week  Source: shutterstock Macro outlook Global Markets: Helpful US PCE inflation data on Friday helped offset mixed earnings news to enable the S&P500 to make some small gains on Friday (+ 0.25%). The NASDAQ gained 0.95%. Chinese markets re-open today after the Lunar New Year Holidays, and the government’s aims to boost consumer spending this year could further help stocks in associated sectors. The Hang Seng Index finished 0.54% higher on Friday. India’s stock markets bucked the positive trend across the region in response to a now well-publicized short-seller report and subsequent rebuttal by one of India’s biggest stocks. Bond markets were fairly quiet on Friday ahead of this week’s big central bank meetings and debt ceiling talks. The 2Y US Treasury saw yields rise 1.6bp while the 10Y bond yield rose less than a basis point to 3.503%. EURUSD has also been fairly steady, currently at 1.0870. Other G-10 currencies are fairly steady too, though there was quite a lot of volatility in the GBP on Friday ahead of this Thursday’s Bank of England rate decision. Asian FX was mixed on Friday, but outside the THB and IDR, which lost some ground to the USD, moves were mostly very slight. G-7 Macro: As mentioned, the PCE deflator data on Friday helped to quell inflation fears. The December core PCE inflation figure dropped to 4.4% from 4.7%, taking the 4Q average to 4.7%, below the Fed’s forecasts from the December FOMC meeting. See more here from James Knightley on this and the slowdown in consumer spending.  Germany releases preliminary 4Q22 GDP data today. The median forecast for this is for zero growth quarter on quarter. China: The Netherlands and Japan will join the US on export controls of advanced chip manufacturing equipment to China. In the short term, China does not have the capacity to expand or upgrade semiconductor chip manufacturing. But at the same time, it means that China knows that it must put R&D of semiconductors and equipment at the core of its national strategy. Also on policy, the government wants growth, and primarily, it wants it from consumption. Local governments are being encouraged to implement measures to increase employment and therefore consumption. We also do not rule out preferential consumption policy, e.g. consumption of household appliances. The PBoC has also extended its re-lending programme for clean coal for this year. This is to ensure sufficient power supply during the economic recovery. What to look out for: FOMC meeting New Zealand trade balance (30 January) South Korea industrial production (31 January) Japan retail sales and industrial production (31 January) Australia retail sales (31 January) China manufacturing and non-manufacturing PMI (31 January) Taiwan export orders (31 January) US Conference board consumer confidence (31 January) New Zealand unemployment (1 February) South Korea trade balance (1 February) Japan Jibun PMI (1 February) Regional PMI manufacturing (1 February) China Caixin PMI manufacturing (1 February) Taiwan industrial production (1 February) Hong Kong GDP (1 February) Indonesia CPI inflation (1 February) US ADP employment change (1 February) ISM manufacturing (1 February) FOMC meeting (2 February) South Korea CPI inflation (2 February) ECB policy meeting (2 February) US initial jobless claims, durable goods orders and factory orders (2 February) Japan Jibun PMI services (3 February) China Caixin PMI services (3 February) Singapore retail sales (3 February) US non-farm payrolls and ISM services (3 February)   Read this article on THINK TagsEmerging Markets Asia Pacific Asia Markets Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Read more
The Downside For The AUD/USD Pair Is Likely To Remain Cushioned

The Downside For The AUD/USD Pair Is Likely To Remain Cushioned

TeleTrade Comments TeleTrade Comments 30.01.2023 10:01
AUD/USD comes under some selling pressure on Monday and hits a fresh daily low in the last hour. A weaker tone around the equity markets is seen exerting pressure on the risk-sensitive Aussie. Bets for smaller Fed rate hikes keep the USD depressed and should help limit losses for the major. The AUD/USD pair attracts some sellers following an early uptick to the 0.7120 area on Monday and remains on the defensive through the early European session on Monday. Spot prices drop to a three-day low, around the 0.7075 region in the last hour, though any meaningful downside still seems elusive. A softer risk tone - as depicted by a weaker trading sentiment around the equity markets - is seen as a key factor driving flows away from the risk-sensitive Aussie. Despite China's move to scale back its strict zero-COVID policy in December, the worst yet COVID-19 outbreak in the country has been fueling uncertainty about a strong economic recovery. This, in turn, tempers investors' appetite for riskier assets and keeps a lid on any optimism in the markets. The downside for the AUD/USD pair, meanwhile, is likely to remain cushioned, at least for now, amid subdued US Dollar price action. In fact, the USD Index, which tracks the Greenback against a basket of currencies, languishes near a nine-month low amid firming expectations for a less aggressive policy tightening by the Fed. The markets seem convinced that the US central bank will soften its hawkish stance and expect a smaller 25 bps rate hike on Wednesday. Read next: A Loss Of $48 Billion In Shares Of The Indian Group Adani As A Result Of The Hindenburg Research Report| FXMAG.COM The bets were lifted by Friday's release of the US Personal Consumption Expenditures (PCE) data, which showed that the Core PCE Price Index fell to the 4.4% YoY rate in December from the 4.7% previous. That said, other US macro data released recently pointed to a resilient economy and backed the case for the Fed to maintain its hawkish stance for longer. Hence, the focus will remain on the outcome of a two-day FOMC meeting, which might provide cues on future rate hikes. Heading into the key central bank event risk, traders might refrain from placing aggressive bets and prefer to move to the sidelines. Apart from this, rising odds for an additional rate hike by the Reserve Bank of Australia (RBA) in February could underpin the Australian dollar and help limit any meaningful corrective pullback for the AUD/USD pair. This makes it prudent to wait for strong follow-through selling before confirming that spot prices have topped out.
The Kiwi Asset (NZD/USD) Is Facing Pressure

The Kiwi Asset (NZD/USD) Is Facing Pressure

TeleTrade Comments TeleTrade Comments 30.01.2023 09:52
NZD/USD is facing hurdles in shifting its auction above 0.6500 amid a recovery in the USD Index. Softening consumer spending has bolstered the expectations of a smaller interest rate hike by the Fed. This week, the release of the NZ Employment data will be of utmost importance. The NZD/USD pair is failing in keeping its auction above the psychological resistance of 0.6500 in the early European session. The Kiwi asset is facing pressure as the US Dollar index (DXY) has shown a perpendicular recovery move after a sheer decline to near 101.40. The recovery move in the USD Index is quite strong and is showing signs of vertical decline in the risk appetite of the market participants. S&P500 futures are continuously adding more losses as investors have underpinned the risk-aversion theme amid soaring volatility ahead of the interest rate decision by the Federal Reserve (Fed). While the alpha generated by the US government bonds has trimmed as investors are seeing a lower terminal rate than previously anticipated. The 10-year US Treasury yields have dropped to near 3.50%. Softening consumer spending and Personal Consumption Expenditure (PCE) Price Index have bolstered the expectations of a smaller interest rate hike by the Fed. It is worth noting that Fed chair Jerome Powell has already trimmed the scale of interest rate hikes in its December monetary policy meeting to 50 basis points (bps) after announcing four consecutive 75 bps rate hikes. The Fed is expected to trim the scale of the interest rate hike further by 25 bps. On the New Zealand front, investors are awaiting the release of the Employment data, which is due on Wednesday. The Employment Change (Q4) is expected to drop to 0.7% from the former release of 1.3%. While the Unemployment Rate is seen unchanged at 3.3%. The New Zealand economy is failing to generate significant employment opportunities amid higher interest rates by the Reserve Bank of New Zealand (RBNZ).  
The Loonie Pair (USD/CAD) Takes Clues From The Downbeat Oil Prices

The Loonie Pair (USD/CAD) Takes Clues From The Downbeat Oil Prices

TeleTrade Comments TeleTrade Comments 30.01.2023 09:46
USD/CAD keeps bounce off 2.5-month low while snapping two-day downtrend. Shift in market sentiment exerts downside pressure on Oil price, favors US Dollar. China-linked headlines entertain traders amid a light calendar. Fed’s dovish hike, softer NFP appears necessary for bears to keep the reins. USD/CAD picks up bids to refresh intraday high around 1.3325 during the first positive day in three heading into Monday’s European session. In doing so, the Loonie pair takes clues from the downbeat Oil prices, Canada’s main export, as well as a rebound in the US Dollar amid the market’s cautious optimism. That said, WTI crude oil takes offers to refresh intraday low near $79.50 as early Asian session optimism, mainly led by China’s return from the one-week-long Lunar New Year (LNY) holidays, fades amid mixed concerns. Read next: A Loss Of $48 Billion In Shares Of The Indian Group Adani As A Result Of The Hindenburg Research Report| FXMAG.COM Also challenging the Oil price could be the US Dollar Index (DXY) rebound from the intraday low while ignoring the US Treasury bond yields. That said, the DXY prints a three-day uptrend near 102.00 but the US 10-year Treasury bond yields retreat from daily tops to 3.50% after the Japanese panel teases hawkish moves of the Bank of Japan (BOJ). Elsewhere, Bloomberg poured cold water on the face of expectations that the holiday season propelled China activities. The analysis stated a few signs of improvement in the Chinese economy despite its second month without Covid Zero curbs. The research, however, marks the Lunar New Year (LNY) holiday season as marking a lid on some activities. Against this backdrop, the US Treasury bond yields retreat from the intraday top but the stock futures print mild losses. Furthermore, the Asia-Pacific shares grind higher and the US Dollar Index (DXY) defends a two-day recovery. Looking forward, risk catalysts are likely to determine short-term market moves ahead of Wednesday’s Federal Open Market Committee (FOMC) and Friday’s US jobs report for January. It’s worth noting that headlines surrounding China are an extra burden on the USD/CAD watchers to determine near-term moves. Technical analysis A four-day-old bearish triangle restricts USD/CAD moves between 1.3290 and 1.3330.

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