exchange rate

FXMAG.COM: Do you expect any radical moves of EUR/GBP price in the near future? What can cause such fluctuations?  As forex traders keenly observe the EUR/GBP currency pair, there is speculation surrounding the likelihood of substantial price movements in the near future. Examining the underlying factors that can trigger notable fluctuations is essential for making informed decisions in the market.   Macroeconomic indicators, including GDP growth, inflation rates, and employment figures, offer valuable insights into the potential for significant moves in the EUR/GBP price.   Based on the latest available data for Q1 of 2023, Eurozone GDP growth experienced a 1.3% increase, while the UK maintained a stable growth rate of 0.10%. Political developments exert a considerable impact on the EUR/GBP exchange rate. Notably, events such as the recent UK election or updates related to Brexit have proven to be catalysts for volatility.   Staying well-informed about key political developments is crucial, as they can significantly influence the price of this currency pair. Central bank policies play a pivotal role in shaping the EUR/GBP exchange rate.   The European Central Bank (ECB) and the Bank of England (BoE) periodically announce monetary policy decisions that affect this currency pair. It is important to keep a close watch on interest rate adjustments, quantitative easing programs, and forward guidance statements.   As of the latest interest rate decision on February 2, 2023, the ECB maintained rates at 3%, while the BoE held rates at 4.5% with a slight increase of 0.25% on May 11, 2023. Global economic trends and market sentiment can also influence the EUR/GBP price.   Trade relations between the Eurozone and the UK, as well as global economic conditions, can cause significant fluctuations. Monitoring geopolitical events, risk appetite indicators, and market sentiment can provide valuable insights into potential radical moves in this currency pair.   Predicting significant shifts in the EUR/GBP price is a complex task. However, analysing key factors such as macroeconomic indicators, political developments, central bank policies, and global economic trends can enhance your understanding of potential fluctuations. As of the latest available data on May 23, 2023, at 12:51, the EUR/GBP exchange rate stands at 0.87057. Stay well-informed about the latest news and events to navigate the market effectively and make informed trading decisions.

Indonesia: Inflation back within target but BI likely on hold until end of year. Headline inflation finally reverted to target in May, with headline inflation slipping to 4.0% year-on-year   Headline inflation back to target after a year Headline inflation slipped below expectations to 4.0% YoY, roughly 0.1% higher compared to the previous month. Inflation is back within Bank Indonesia's (BI) 2-4% target after 12 months and will likely stay within target for the rest of the year. Headline inflation enjoyed a much more pronounced moderation this year, sliding back within target even ahead of BI's expectations. Lower energy and food prices from a year ago level helped push headline inflation lower or unchanged across all items in the CPI basket. Meanwhile, core inflation was also down, dipping to 2.7% YoY and also lower than market expectations (2.8%).       Price stability objective reached but BI likely on hold to steady the IDR Bank Indonesia was one of the first central banks in the region to pause its tightening cycle earlier this year. BI Governor Perry Warjiyo who had expected inflation to slow gradually and revert to target by 3Q, has kept rates at 5.75% since the 16 February policy meeting. Despite the quick reversion to target for inflation, we believe BI will carry out an extended pause to shore up support for the Indonesian rupiah, which was down roughly 2.15% for the month of May. Thus we expect BI to retain policy rates at 5.75% until the end of the year and only consider cutting policy rates should global central banks opt to ease monetary policy.

A hawkish hold from the Bank of Canada next week We expect the BoC to leave the policy rate at 4.5% next week, but after stronger-than-expected consumer price inflation and GDP and with the labour data remaining robust we cannot rule out a surprise interest rate increase. The market is pricing a 25% chance of a hike on 7 June, and a hawkish hold should be anough to keep the Canadian dollar supported.   Canadian resilience means a rate hike can't be ruled out The Bank of Canada last raised rates on 25 January and have held it at 4.5% ever since. The statement from the last meeting in April commented that global growth had been stronger than expected and that in Canada itself, “demand is still exceeding supply and the labour market remains tight”. The bank warned that it was continuing to “assess whether monetary policy is sufficiently restrictive and remain prepared to raise the policy rate further” to ensure inflation returns to 2%.   Since then we have had additional warnings from Governor Tiff Macklem that the bank remains concerned about upside inflation risks with the latest CPI report showing a month-on-month increase in prices of 0.7% versus a consensus forecast of 0.4%, resulting in the annual rate of inflation rising to 4.4%. The economy added another 41,400 jobs in April, more than double the 20,000 expected with wages rising and unemployment remaining at just 5%. The resilience of the economy was then emphasised further by first quarter GDP growth coming in at 3.1% annualised, beating the 2.5% consensus growth forecast. Consumer spending was the main growth engine, rising 3.1%.     But we favour a hawkish hold – signalling action unless inflation softens again soon Nonetheless, the BoC accept that monetary policy operates with long and varied lags and continue to believe that “as more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year”. This will help to dampen inflation pressures and with commodity price softening we still believe that inflation can get close to the 2% target by the early part of 2024.   With the US economic outlook also looking a little uncertain, we doubt that the BoC will want to restart hiking interest rates unless it is certain that inflation pressures will not moderate as it has long been forecasting. Consequently we favour a hawkish hold, signalling that if there isn’t clearer evidence of softening in price pressures it could raise rates again in July.     The loonie's resilience can continue The Canadian dollar has been the best G10 performing currency in the past month, largely thanks to its high beta to the US economic narrative and a repricing of Canada’s domestic rate and growth story. These factors have outshadowed crude’s subdued performance in May and some risk sentiment instability.   A hawkish tone by the Bank of Canada at the June meeting is clearly an important element to keep the bullish narrative for CAD alive. As shown below, the recent repricing in Fed rate expectations caused a rebound in short-term USD swap rates relative to most currencies (like the euro), while the USD-CAD 2-year swap rate differential has remained on a declining path also throughout the second half of May.     As long as the BoC does not push back against the pricing for a hike in the summer, we expect CAD to remain supported. Some lingering USD strength in June can put a floor around 1.33/1.34 in USD/CAD, but we expect a decisive move to 1.30 in the third quarter and below then level before the end of the year.  

The GBP/USD currency pair continued its decline on Monday, which had started on Friday. Recall that on Friday, a single report triggered a strong US dollar. This report is the Nonfarm Payrolls. In recent months, many analysts have regularly claimed that the US labor market is in recession, with the number of jobs created decreasing monthly.   Therefore, the situation is expected to worsen further, which may force the Federal Reserve (Fed) to ease its monetary policy earlier than scheduled. However, every new Nonfarm report proves only one thing: the labor market is in good shape. As previously noted, a normal report value can be considered in the 200-250 thousand range. For several consecutive months, we have been observing precisely such figures. There has not been a report below 200 thousand in the last 12 months.     Therefore, the Fed has the opportunity to maintain the rate at its maximum level and to continue tightening its monetary policy. And this combination of factors should support the dollar, not the pound. Now let's look at the technical picture. The British pound has been confidently rising for the past nine months. Moreover, it has been challenging to pinpoint the reasons for its growth in the last three months.   As a result, it has become overbought and unreasonably expensive. What kind of movement can we expect from a pair that is not only overbought and lacks factors for new growth but also faces fundamental and macroeconomic pressures for its decline? That's why we have advocated and continue to advocate for the decline of the British currency. The first target we still see is the level of 1.2170, which corresponds to the Senkou Span B line. The Fed can raise the rate in both June and July. According to the FedWatch tool, the current rate hike probability at the June meeting is only 22%.   Just a week ago, the probability exceeded 50%. We believe that the market has not paid due attention to a whole series of "hawkish" comments from members of the Fed's monetary committee. Or perhaps it paid too much attention to the words of other Fed officials about "raising the rate once every two meetings." However, the market believes the next tightening can be expected in July. The probability of a July hike is currently at 54%.     Either way, we are talking about an unplanned rate hike. The market did not factor in a dollar exchange rate increase above 5.25%. However, the current labor market state allows the US regulator to raise the rate one or two more times.     And this, in turn, supports the dollar, which should grow even without this factor. Separately, it should be noted that the situation with the US debt ceiling has been resolved. Joe Biden signed the relevant document, so we can put a bold period in this saga.     The US dollar did not react much to this saga and had been rising more than falling in the past month, which is at least illogical for a country's currency on the brink of default. This influence on market sentiment is neutralized, so nothing should prevent the dollar from rising now.   We can still expect 1-2 rate hikes from the Bank of England, but the market has already priced them in. No matter how you look at it, the pound has no grounds for further growth. The market quickly worked off the oversold condition of the CCI indicator, which occurred accidentally on May 11th, and now the decline can continue. It failed to consolidate above the critical line in the 24-hour time frame, so the decline can continue. There will be few macroeconomic statistics this week, so nothing should hinder the decline.     The average volatility of the GBP/USD pair for the past five trading days is 109 points. For the pound/dollar pair, this value is considered "average." Therefore, on Tuesday, June 6th, we expect movements within a channel bounded by the levels of 1.2327 and 1.2545. A reversal of the Heiken Ashi indicator upwards will signal a possible resumption of an upward movement.   Nearest support levels: S1 - 1.2421 S2 - 1.2390 S3 - 1.2360   Nearest resistance levels: R1 - 1.2451 R2 - 1.2482 R3 - 1.2512   Trading recommendations: The GBP/USD pair on the 4-hour timeframe has settled back below the moving average line, so short positions with targets at 1.2360 and 1.2329 are currently relevant. This should be opened if the price bounces off the moving average from below. Long positions can be considered if the price stabilizes above the moving average with targets at 1.2512 and 1.2543.   Explanations for the illustrations: Linear regression channels - help determine the current trend. It indicates a strong current trend if both are directed in the same direction. Moving average line (settings 20.0, smoothed) - determines the short-term trend and direction in which trading should be conducted. Murray levels - target levels for movements and corrections. Volatility levels (red lines) - the probable price channel in which the pair will move the next day based on current volatility indicators. 0000 CCI indicator - its entry into the oversold zone (below -250) or overbought zone (above +250) indicates an approaching trend reversal in the opposite direction.    

The Czech koruna reached essentially its strongest levels against the euro in history in 2Q and remains below EUR 24/CZK. However, the attractiveness of the koruna declined in May as the CNB hawkish story came to an end and attention shifted elsewhere in the region. We think the koruna still has a lot to offer - high carry, balanced market positioning and a central bank ready to intervene in the FX market if the koruna weakens. In addition, the CZK has by far the highest beta against EUR/USD in the region, making it a good proxy for a global story view with a high CEE carry element.   Financial markets are currently pricing in too much rate cutting this year. Thus, any central bank hints of rate cuts, which is not a topic for the CNB at the moment, or lower inflation numbers should not threaten the crown, unlike other currencies within the region. Moreover, in our base case scenario, we expect EUR/USD to rebound in the coming months, which should benefit the koruna the most in the region. This is also helped in many ways by a more balanced market positioning versus PLN or HUF, for example. Thus, we expect the koruna to stay in the current range of 23.50-24.00 EUR/CZK with trips to lower levels depending on the global story.   FX – spot vs forward and INGF   CNB FX reserves declined but remain significant (€bn)   Fixed Income strategy The financial markets are pricing in a first 25bp rate cut in September and 95bp overall this year, while we see room for only one or at most two 25bp rate cuts this year. Thus, we think the market has gone too far and the CNB meeting should be a reminder of CNB hawkishness despite lower inflation numbers, which are not sufficiently low for the central bank yet. Overall, we see the market calling for an upward correction in rates.   Foreign holders of CZGB (%)   CZGBs issuance (CZKbn)    

President Erdogan was re-elected and the Erdogan-led People’s Alliance won a simple majority in Parliament. The macro outlook points to a need to rebalance the economy given that: (1) the current account deficit has remained on an expansionary path; (2) total capital flows have remained weak; (3) there is a major fiscal expansion; and (4) the extra fiscal burden and the CBT’s supportive stance create further pressure on already elevated inflation.   In this environment, the main policy debate focuses on interest rate policy and whether there will be a return to a more conventional policy setting post-elections. The appointment of Mehmet Simsek as Minister of Economy and Finance shows an intention to return to conventional economic policies, though it is too early to decide the degree of orthodoxy. The signals imply that actions will be taken without delay following formation of new economy management.   Forecast summary   Macro digest 1Q23 Turkish GDP growth came in at 4.0% year-on-year, slightly better than market consensus, on the back of private consumption, government consumption and gross fixed capital formation, while net exports were a drag once again. On a quarter-on-quarter basis, 1Q23 GDP growth was 0.3% after seasonal adjustments, showing some momentum loss compared with a relatively strong reading in 4Q22 of 0.9%.   Moderating sequential performance is attributable to: (1) a deceleration in household consumption to the lowest growth rate since the last quarter of 2020, also likely reflecting the impact of the earthquake disaster; and (2) government expenditure turning negative while stocks positively contributed to the headline and investment appetite remained solid.   Early indicators for 2Q23, on the other hand, hint at an acceleration in the GDP expansion on a yearly basis in comparison to 1Q23 given: (1) realisations of real sector confidence and capacity utilisation reflecting a continued strengthening in manufacturing, leaving the effects of the earthquake disaster behind; (2) further improvement in PMI to above the first quarter average, while confidence indicators for retail, construction and services show further improvement.   As growth forecasts for 1H23 imply a better-than-expected performance, the macro indicators point to a need to rebalance the economy. In this regard, the assignment of a new economy management team and guidance on policy direction will be key for the outlook, in our view.   GDP growth, on a quarterly basis (% YoY)   PMI and IP (seasonally adjusted, 3m-ma, % YoY)   Annual inflation has remained on its downward path in May thanks to: (1) TurkStat's implementation of the ‘zero price’ method for natural gas subsidies. Accordingly, the natural gas sub-group saw a monthly price decline of 100%; (2) the 2003-based index average for May in the last five years pointed to a favourable base effect for this year. Core inflation (CPI-C) rose to 46.6% on an annual basis.   This suggests that the exchange rate and commodity price-driven improvements in core inflation indicators in recent months may have come to an end. The underlying trend for the headline markedly recovered in comparison to the previous month thanks to goods inflation, while the services group has maintained the elevated trend given continuing pressures in rent, catering and telecommunication services. Despite the elections being behind us, at this stage uncertainty about exchange rates and interest rates persists, but it is expected that the new economy management team, led by Mehmet Simsek, will bring about significant changes in the CBT and the monetary and exchange rate policy to be implemented in the short term.   Accordingly, a lira adjustment postelection and potential adjustments in wages and administered prices are likely to weigh on inflation momentum, while a new equilibrium in rates will be key to return to disinflation in the period ahead.   Inflation (% YoY)

Market stability has remained in place in all major submarkets (FX, bonds & swaps). Although the forint has been weakening in recent days, the exchange rate against the euro has not hit a critical level that could prompt the central bank to back down. Nor do we see any grey clouds hovering over global financial markets that could darken the future. This is certainly a significant help, as it continues to mean a constructive investment environment overall. In addition, the major central banks (Federal Reserve, European Central Bank) have not surprised markets in any meaningful way, which would be drastically countered by the easing of the Hungarian central bank.   Hungarian yield curve   We don't expect any substantive change in the tone of the press release and the expected press conference. The National Bank of Hungary will continue to define the series of interest rate cuts as a function of market stability and remain committed to the principles of gradualism and prudence. Obviously, the central bank will underscore the acceleration of disinflation as a significant factor, but we think that the Monetary Council will still not want to make any substantive comment on a possible cut in the base rate soon. In other words, the sound distinction between market stability and price stability will remain. The forward guidance is, therefore, unlikely to change in light of this.   ING's inflation and base rate forecasts for Hungary   Looking further down the road If the supportive environment remains and market stability is maintained, the NBH is going to continue its series of gradual interest rate cuts of 100bps. Accordingly, the base rate and the effective rate should merge at 13% at the September rate decision, in our base case. As to whether the rate cuts will resume immediately from here or whether there will be a pause, we will only be able to say with a high degree of certainty once we have seen market conditions and the inflation situation in the autumn. At the moment, we would give a higher probability to a pause of one or two months after September. When we see that inflation has fallen to single-digit levels (which could happen as early as November, so the NBH can make a decision in December with this in mind), then the base rate cut will start.

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Japan releases Tokyo Core CPI on Friday USD/JPY moves closer to symbolic 145 line Ueda says no changes to policy unless core inflation rises USD/JPY has edged lower on Thursday. In the European session, the yen is trading at 144.19, down 0.20%. The yen dropped as low as 144.70 in the Asian session, as the symbolic 145 line remains under pressure.   Tokyo Core CPI expected to tick higher Japan releases a key inflation indicator, Tokyo Core CPI, on Friday. The indicator dipped to 3.2% in May but is expected to inch up to 3.3% in June. Tokyo CPI excluding food and energy, currently at 2.4% and known as the “core core index”, will be under the microscope after the National “core core index” rose unexpectedly in June. Earlier this week, BoJ Core CPI, the preferred inflation gauge of the central bank, rose from 2.9% to 3.1%, above the consensus of 3.0%. If today’s inflation report also shows that inflation is creeping higher, it will put into question the BoJ’s stance that cost-driven inflation is temporary and therefore there is no need to tighten monetary policy. Governor Ueda reiterated this position at the ECB Bank Forum on Wednesday. Ueda stated that he would continue the BoJ’s ultra-easy monetary policy unless he was “reasonably sure” that inflation accelerated in 2024. He said that the BoJ was not confident that this would occur, noting that even though headline inflation was above 3%, core inflation remained below the Bank’s 2% target. The BoJ’s ultra-accommodative policy has seen the yen slide to 7-month lows, which has drawn warnings from the Ministry of Finance about intervening in the currency markets. Ueda declined to comment on the possibility of intervention, saying that the BoJ was closely monitoring the exchange rate and that the yen was influenced by many other factors besides BoJ policy.     USD/JPY Technical There is resistance line at 144.65 and 145.36 143.94 and 142.94 are providing support  

The Norwegian krone, except for the Japanese yen, has faced a challenging start in 2023 as it emerged as the worst-performing G10 currency. This downward trend continued from the previous year, resulting in disappointments for the Scandinavian currency. However, experts have argued that the krone was undervalued given Norway's robust macroeconomic fundamentals. Now, with the help of a hawkish Norges Bank, which recently increased rates by 50 basis points in June, the currency is showing signs of recovery. The Norges Bank's decision to adopt a more hawkish stance should not come as a surprise. Core inflation, a key indicator of price dynamics, reached new highs in May. Additionally, the latest report from the Norges Bank indicates that Regional Network contacts expect wage growth to reach 5.4% in 2023, marking its highest level since 2008. These developments provide further support to the notion that price pressures in Norway may be more persistent than previously anticipated. FXMAG.COM: How would you comment on the latest data from the Norwegian economy and the actions of the central bank there, and what about the Norwegian krone as a result?   Michal Jozwiak: Aside from the Japanese yen, the Norwegian krone has been the worst performing G10 currency so far in 2023 - last year was also marked by disappointments for the Scandinavian currency. For a while, we have argued that the krone was deeply undervalued, particularly given Norway’s excellent macroeconomic fundamentals, and it seems that, with the help of a hawkish Norges Bank, which hiked rates by 50bps in June, the currency is beginning to recover.  Norges Bank’s recent hawkish pivot should come as no surprise. Core inflation, our preferred measure of price dynamics, rose to new highs in May. Furthermore, based on the recent report from the Norges Bank, Regional Network contacts expect wage growth to reach 5.4% in 2023 – its highest level since 2008. This gives further backing to the argument that price pressures in Norway may be more stubborn than previously thought.   The market is currently pricing in about 50bps of rate hikes in the next six months, however, we do not rule out an even more hawkish stance should we see further increases in core inflation and wages, possibly at the expense of lower growth in 2023. The possibility of higher central bank rates, and a degree of normalisation in the exchange rate that moves it closer to values justified by its fundamentals should, we believe, allow NOK to recover some of its earlier losses in the coming months.

Turkey's inflation situation continues to be a major concern, with both the Consumer Price Index (CPI) and Producer Price Index (PPI) readings showing persistently high levels. The recent depreciation of the Turkish currency has exacerbated the pro-inflationary pressures in the country. While the annual CPI growth rate is declining due to the high base effect from the previous year, the monthly pace in June remains concerning, indicating that the inflationary challenges persist. In June, producer prices rose by 6.5% month-on-month and 40.4% year-on-year, leading to price increases that are being passed on to consumers. The significant 25% devaluation of the lira in June could lead to consumer prices rising by over 5% in July, pushing the annual inflation rate to 42.2%.   FXMAG.COM:  What is your assessment of the CPI and PPI readings from Turkey, and do they allow the central bank to continue too loose a monetary policy?  Inflation in Turkey remains among the highest in the world, and the recent weakening of the currency has further fuelled pro-inflationary developments. Although the annual rate of CPI growth is falling, this is the effect of last year's high base. The monthly pace (+3.92% m/m) in June suggests the inflationary drama continues. Producer price growth in June was 6.5% m/m and 40.4% y/y, forcing price increases to be passed on to end consumers. Following the 25% devaluation of the lira in June, consumer prices in Turkey for July could rise by more than 5%, bringing annual inflation to 42.2%.Does Turkey have any chance at all of returning to its inflation target? Monetary policy remains too loose for such monetary conditions, provoking capital outflows from the currency and further weakening its exchange rate, which no longer has the resources to support it. Nevertheless, the president largely dictates this policy, so we have not seen any big changes in recent months, despite initial hopes.

BoJ Summary of Opinions takes note of higher inflation US job report a mixed bag The Japanese yen has started the week in negative territory. In the European session, USD/JPY is trading at 142.36, up 0.42%. BoJ says monetary easing to continue Inflation continues to be a key issue for the Bank of Japan, although it is much lower than in other major economies, at around 3%. Still, inflation is above the Bank’s 2% target and this continues to raise speculation that the BoJ will have to tighten policy sooner or later. The BoJ has pushed back against talk that it will tighten, and when the central bank recently made its yield curve control (YCC) more flexible, Governor Ueda was careful to stress that the step did not represent a move towards normalization. Against this backdrop, the BoJ released its Summary of Opinions earlier today. The members reiterated the necessity to keep an ultra-easy monetary policy in place, but some members noted that inflation and wages could continue to increase. One opinion went as far as to state that 2% inflation “in a sustainable and stable manner seems to have clearly come in sight” and urged the BoJ to make YCC more flexible. This BoJ internal conversation could be a signal that policy makers are slowly acknowledging that inflation, which has been above the 2% target for months, may be sustainable. That would mark a sea change in the BoJ’s thinking and could have major ramifications on the exchange rate. The US employment report for July was a mix. Nonfarm payrolls were soft at 187,000, despite a banner ADP release which fuelled expectations of a breakout nonfarm payrolls release. Job growth is slowing, but the unemployment rate ticked lower to 3.5% down from 3.6%, and wage growth stayed steady at 4.4%.  

GBP: Unusually stable BoE rate expectations The data and Bank of England event calendars are empty today and tomorrow in the UK, and will only pick up again on Friday with the release of GDP and industrial production. The lack of domestic events in the UK has helped an unusual period of very stable BoE rate expectations: markets appear rather anchored to the prospect of a peak rate around 5.70-5.75% for now. EUR/GBP has faced some downward pressure, likely due to the negative impact of the Italian bank windfall tax announcement on the euro, but looks unlikely to break out of recent ranges. 0.8600 should continue to be the gravity level for now.      

EUR: Hard to find forces to defend the euro The calendar doesn't have much to offer in the eurozone today, resulting in a lack of impetus to defend the euro. The second-quarter GDP estimate and the headline industrial production number are unlikely to change the picture much and so the ball remains in the US court today. At least the 2y rates differential against the USD has flipped in support of the euro or at least should not push EUR/USD any further down. However, if the strong condition of the US economy is confirmed, it will be hard for EUR/USD to resist breaking 1.090. That should be the line in the sand today as well.

PLN: Damage control after a closed market We have GDP data in the region with second-quarter results across the board. We expect -0.3% year-on-year in Poland, -1.2% YoY in Hungary and +2.4% YoY in Romania, all more or less in line with market expectations. To complete the picture, the Czech Republic reported -0.6% YoY earlier. Also later today, core inflation in Poland will be released. We estimate that core inflation moderated to 10.5% YoY from 11.1% YoY in the previous month. The Polish market opening after yesterday's holidays and Monday's limited trading will be especially interesting. By comparison, Czech rates have strictly followed core rates in the last two days and the Polish market should catch up today. But at the same time, yesterday the Polish zloty almost touched the upper boundary of the long-term range of 4.40-4.50 EUR/PLN, which we last saw in early July. As we mentioned earlier, for the entire CEE region, the US dollar still seems to be the main driver, indicating weaker values across the board. At the same time, yesterday we saw gas prices jump back to 40 MWh/EUR following news from Australia, again not signalling positive conditions for CEE FX. On the other hand, the interest rate differential is starting to play a role in the region again after some time and if PLN rates catch up after the close of trading, EUR/PLN should stave off touching the 4.50 level and return to 4.46. But a stronger US dollar on more negative news for EM FX is a clear risk here.

Japanese yen rebounds, but intervention worries remain Japan releases July inflation on Friday The Japanese yen has bounced back on Thursday after failing to post a winning day since August 4th. In the North American session, USD/JPY is trading at 145.92, down 0.30%. USD/JPY has been the worst performer among the major currencies over the past month, declining about 7%. The yen dropped below the 146 line on Wednesday which marked a new nine-month low. The Japanese currency lost ground in the aftermath of the Federal Reserve minutes, in which members expressed concern about high inflation. The sharp depreciation of the Japanese currency is raising concerns that Japan’s Ministry of Finance (MOF) could respond by intervening in the currency markets in order to prop up the yen. The yen is now trading at levels at which the MOF shocked the markets last September and instructed the Bank of Japan to sell billions of dollars in support of the yen. The MOF and the BoJ have stated in the past that they are more concerned with sharp swings in the exchange rate and not so much with a particular value for the yen. The yen has plunged about 800 points since late July which means that another intervention cannot be ruled out. The US/Japan rate differential has been widening, with the yen depreciating as a result. The economic troubles in China have led to a sharp drop in the Chinese yuan, which is another factor weighing on the ailing yen. Japan releases the July CPI inflation report on Friday. Headline CPI is expected to fall from 3.3% to 2.5%, while the core rate is projected to dip from 3.3% to 3.1%. The ‘core-core’ rate, which excludes food and energy items, is projected to rise to 4.3%, up from 4.2%. Any surprises from the inflation report could mean volatility for the Japanese yen.   USD/JPY Technical There is resistance at 146.74 and 147.31 USD/JPY tested support at 145.71 earlier. Below, there is support at 144.92  

The Japanese yen faced considerable losses on Monday as USD/JPY surged to 146.23 during the North American session, marking a 0.57% increase for the day. The US dollar's strength has propelled it dangerously close to pushing the yen below the critical 146 line, a scenario witnessed last week when the robust US dollar drove the struggling yen to a nine-month low. Once synonymous with deflation, the Japanese economy has undergone a significant transformation in the era of high global inflation. With Japan's inflation hovering slightly above 3%, a level that many major central banks would eagerly welcome, the landscape has shifted. Notably, inflation remains relatively high by Japanese standards, as both headline and core inflation have consistently outpaced the Bank of Japan's (BoJ) 2% target. Japan's inflation data is closely scrutinized as the prospect of elevated inflation sparks speculations that the BoJ might need to tighten its lenient policy stance. Although the central bank has maintained that the high inflation is transitory, it's worth remembering that other central banks have made similar claims only to backtrack later. The Federal Reserve (Fed) and the European Central Bank (ECB) come to mind as examples. In the previous week, July's Consumer Price Index (CPI) remained steady at 3.3% year-on-year, while Core CPI experienced a slight dip to 3.1% year-on-year from the previous 3.3%. Looking ahead, Tuesday brings the release of BoJ Core CPI, the central bank's favored inflation metric, which is projected to decrease to 2.7% for July, down from June's 3.0%.   USD/JPY pushes above 146 line Bank of Japan’s Core CPI is expected to ease to 2.7% The Japanese yen has posted significant losses on Monday. USD/JPY is trading at 146.23 in the North American session, up 0.57% on the day. The US dollar has looked sharp and is within a whisker of pushing the yen below the 146 line, as was the case last week when the strong US dollar pushed the ailing yen to a nine-month low. The Japanese economy was once synonymous with deflation, but that has changed in the era of high global inflation. Japan’s inflation is slightly above 3%, a level that other major central banks would take in a heartbeat. Still, inflation is relatively high by Japanese standards and both headline and core inflation have persistently been above the Bank of Japan’s 2% target. Japan’s inflation reports are carefully monitored as higher inflation has raised speculation that the BoJ will have to tighten its loose policy. The central bank has insisted that high inflation is transient, but the BoJ wouldn’t be the first bank to make that claim and then backtrack with its tail between its legs. Remember the Fed and the ECB? Last week, July’s CPI remained unchanged at 3.3% y/y. Core CPI dropped to 3.1% y/y, down from 3.3%. On Tuesday, Japan releases BoJ Core CPI, the central bank’s preferred inflation gauge, which is expected to dip to 2.7% in July, down from 3.0% in June. China’s economic troubles have sent the Chinese yuan sharply lower, with the Chinese currency falling about 5% this year against the US dollar. A weak yuan makes Chinese exports more attractive, but this is at the expense of other exporters including Japan. As a result, there is pressure in Japan to lower the value of the yen in order to compete with Chinese exports.   USD/JPY Technical USD/JPY pushed above resistance at 145.54 earlier today. The next resistance line is 146.41 There is support at 144.51 and 143.64    

GBP: Volatile pricing ahead of PMIs Bank of England rate expectations have been quite volatile since the upside surprise in wages and CPI last week. The miss in retail sales on Friday saw peak Bank rate expectations as measured in the Sonia rate drop more than 10bp. Markets are currently looking at 5.95-6.0%, but today’s PMI release in the UK may well move pricing again. Consensus is expecting some slowdown in both manufacturing (already in contraction territory) and services (to 51.0). The Bank of England will also look at the details of the survey searching for evidence that price pressures are abating. EUR/GBP can make another attempt at breaking 0.8500 today, although the sustainability of sub-0.8500 levels is questionable unless markets price in more rate hikes in the UK or price out tightening in the eurozone.

SEK: Enjoying a breather The Swedish krona is emerging as an outperformer this week without any clear domestic driver justifying its strength against peers. EUR/SEK had risen above 11.90 and eyed 12.00, reaching new highs last week, and we suspect this week’s correction is primarily technically driven. News on the troubled landlord SBB continues to worry investors, although at these levels, SEK is pricing in quite a good deal of domestic risks. Incidentally, the housing market has shown signs of stabilisation, which might leave slightly wider manoeuvring room for the Riksbank to deal with high inflation. Keep a close eye on today’s Nvidia quarterly results. SEK is generally the most correlated G10 currency with US tech stocks. A disappointment on that side could trigger another EUR/SEK rally, even though some EUR softness is now helping put a cap on the pair. For the moment, a break above 12.00 is not our baseline scenario, and we see instead greater chances of a gradual – although bumpy – decline in the pair into year-end.  

New inflation methodology offers hope for BoE 1.28 could be major resistance point for GBPUSD A break of 1.26 could be bearish signal   Recent UK economic data has been a mixed bag, with wages rising at a much-accelerated rate but inflation decelerating as expected. While the Bank of England will be relieved at the latter, the former will remain a concern as wage growth even near those levels is not consistent with inflation returning sustainably to target over the medium term. The ONS released new figures overnight that appeared to suggest core inflation is not rising as fast as the CPI data suggests. The reportedly more sophisticated methodology concluded that core prices rose 6.8% last month, down from 7% the previous month and 7.3% the month before. The official reading for July was slightly higher at 6.9% but down from only 7.1% in May. So not only is the new methodology showing core inflation lower last month but the pace of decline is much faster. That will give the BoE hope that price pressures are easing and they’re expected to do so much more over the rest of the year.     GBPUSD Daily     It’s not clear whether this will prove to be a resumption of the uptrend or merely a bearish consolidation. It is currently nearing 1.28, the area around which it has previously run into resistance this month and around the 38.2% Fibonacci retracement level. Another rebound off here could be viewed as another bearish signal, which may suggest we’re currently seeing a bearish consolidation, while a move above could be more promising for the pound. If the pair does rebound lower then the area just above 1.26 will be key, given this is where it has recently seen strong support. It is also where the 55/89-day simple moving average band has continued to support the price in recent months.

NZD/USD posts strong gains on Tuesday New Zealand retail sales are expected to decline by 2.6%   The New Zealand dollar has posted strong gains on Tuesday. In the European session, NZD/USD is trading at 0.5959, up 0.55%. On the data calendar, New Zealand retail sales are expected to decline by 2.6% q/q in the second quarter, compared to -1.4% in Q1. The New Zealand dollar has gone on a dreadful slide since mid-July, falling as much as 500 basis points during that spell. The current downswing has been driven by weak global demand and jitters over China’s economy, which is showing alarming signs of deterioration. Chinese releases have been pointing downward recently. Exports and imports have fallen, manufacturing activity is weak and the world’s second-largest economy is experiencing deflation. Last week, Evergrande, a huge Chinese property developer, filed for bankruptcy in the United States, raising fears of contagion to other parts of the economy. It wasn’t long ago that the Chinese ‘miracle’ was being touted as an economic powerhouse on the global stage, but now the world’s second-largest economy is in deep trouble and is dragging down global growth. An interesting silver lining is that deflation in China could help lower inflation worldwide, which would be good news for the Fed, ECB and other central banks that are battling to push inflation lower. The People’s Bank of China (PBOC) has responded in recent days to the economic slowdown with some cuts to lending rates, but surprisingly, has not trimmed the five-year loan prime rate, which has a major impact on mortgages. The PBOC’s lukewarm move to the economic crisis could mean China’s economy will continue to sputter, and that is bad news for the New Zealand dollar, as China is by far New Zealand’s largest trading partner. If Chinese releases continue to head lower, we can expect the New Zealand dollar to continue losing ground.   NZD/USD Technical NZD/USD has pushed above resistance at 0.5941 and is putting pressure on resistance at 0.5978. There is support at 0.5885 and close by at 0.5848  

Governor Thedeen say krona is fundamentally undervalued Markets fulling pricing in September Riksbank quarter-point rate hike Sweden’s government expects economy shrink by -0.8% in 2023 (previously eyed -0.4%) Sweden’s krona has been punished as the economy appears to be headed for a tough recession. Core inflation is coming down too slowly and that will keep the Riksbank hiking even as expectations grow for a lengthy recession.  The krona has not been getting any relief as many Swedes have started to embrace holding euros given the krona’s record plunge this year. Riksbank Governor Thedeen Riksbank governor Thedeen said that “the krona is too weak and it is fundamentally undervalued.” He added that “it should strengthen and we think that it will, but we know that it is almost impossible to predict currency moves over the short and medium term.” It is tough to call for a reversal after watching the krona fall to a fresh all-time low against the euro.  The current market expectations for the September meeting is to see the Riksbank raise rates by 25bps to 4.00%.  A freefalling krona is complicating the inflation fight, but that could see some relief as the outlook for the eurozone deteriorates. Expectations for the Sweden’s GDP are not seeing a strong consensus emerge.  Given the currency and inflation situation, it seems that the economy could be entering a recession that last more than a handful of quarters. The Swedish government is expecting a 0.8% decline in 2023 and a 1.0% growth for 2024.  It seems hard to believe that households will be a better position anytime soon, so a recession extending beyond 2024 seems likely.   The EUR/SEK weekly chart     EUR/SEK (weekly chart) as of Thursday (8/24/2023) shows the uptrend to record high territory is showing overbought conditions have arrived.  If the krona is able to firm up here, a mass exodus of EUR/SEK bullish bets could see price action tumble towards the 11.7118 region. If the plunge deeper into record low territory continues, EUR/SEK could make an attempt at the 12.000 which is just below the 141.% Fibonnaci expansion level of the 2020 high to 2021 low move. Last week, the krona was the most volatile G10 currency, so we should not be surprised if that volatility extends further given the chaos in the bond markets.    

Global bond yields have noticeably fallen in the last 24 hours after softer-than-expected preliminary PMI data. A significant drop in activity has been noted in the eurozone's services sector, especially in Germany. This reduces the chances of the European Central Bank raising rates in September and weighs on the euro. On Thursday, the market will focus on the report on durable goods orders and the weekly unemployment benefits. USD/CAD Retail sales in Canada showed weak results, leading to a decline in yields of short-term Canadian government bonds and a decrease in the CAD exchange rate.       At the same time, the pace of growth in average wages remains high, as the labor market supply lags behind demand. To curb inflation, there needs to be a swift deceleration in wage growth, which is only possible in conditions of a saturated labor market or a general economic slowdown. Another route is an increase in productivity, which remains low with no signs of improvement yet. The net short position on CAD increased by CAD 799 million for the reporting week, reaching CAD -845 million. Positioning is bearish, and the price is moving upwards.   A week earlier, we assumed that the upward movement would progress, and the main target is the upper band of the channel at 1.3690/3720. This target remains relevant. The consolidation is due to technical reasons rather than fundamental ones, and after the consolidation or minor correction concludes, we expect to see further growth.   We perceive support in the middle of the channel at 1.3360/80, but a potential decline to this zone before turning upwards seems unlikely. USD/JPY The core inflation rate (excluding fuel and food prices) in July accelerated from 4.2% to 4.3%, indicating that the Bank of Japan's cautious policy hasn't yielded significant results yet. The BOJ is the only one among major central banks continuing an ultra-soft policy, based on the assumption that inflation largely has an imported nature and will decrease as soon as global energy prices stabilize and the previously disrupted supply chains of goods and raw materials are restored       Such an approach might be justified, but the growth in core inflation indicates that there's more to it, and the Bank needs to be very cautious in choosing its next steps. The Ministry of Finance plans to allocate 28,142.4 billion yen to service the national debt in the 24th fiscal year, which is 2,892.1 billion yen more than in the 23rd fiscal year. The rate used to calculate JGB bond servicing costs remained at 1.1% for seven years, from the 17th to the 23rd fiscal year. If the Bank of Japan begins to raise the accounting rate, the calculated rate for servicing will also be increased for the first time in 17 years. Currently, there are no problems in servicing the national debt, but by the end of the 22nd fiscal year, the outstanding volume of JGBs amounted to a staggering 1,027 trillion yen. If Japan's economy continues to grow, increasing tax revenues will allow the debt to be serviced without significantly increasing borrowing.   However, if the global economic crisis intensifies, an increase in the BOJ's rate will lead to a rapid increase in the government's debt servicing expenses. For now, we must assume that any hints at an interest rate hike will lead to the yen's growth, complicating the debt servicing situation due to a deteriorating trade balance and reduced budget revenues. The Japanese government fears this scenario, hence any comments on monetary policy will continue to be very cautious. In the current circumstances, the yen is more likely to depreciate than strengthen. The net short position on JPY was slightly adjusted by 300 million, to -6.952 billion, with positioning decidedly bearish. The price is above the long-term average, the trend remains bullish, but the chances of an extended consolidation or a shallow correction has increased.     We expect an uptrend from the USD/JPY, with the upper band of the channel at 147.80/148.10 as the target. The risk of a deeper correction to the middle of the channel at 142.50/80 has increased, but the long-term trend remains bullish, and there's no reason to anticipate a reversal at the moment.  

Euro falls below 1.08 for first time since June Fed’s Harker says interest rates may have peaked The euro has extended its losses for a second straight day. In the European session, EUR/USD is trading at 1.0785, down 0.23% and falling below the 1.08 line for the first time since June. Later today, Germany’s Business Climate is expected to ease for a fourth straight month. It has been a nasty slide for the euro, which has been unable to find its footing and has plunged a staggering 500 points over the past six weeks. EUR/USD is down 0.80% this week, in large part due to soft eurozone manufacturing and services PMI readings on Wednesday. The eurozone economy has been damaged by the war in Ukraine and Germany, known as the locomotive of Europe, is in trouble as well. The deterioration of China’s economy is more bad news for the eurozone’s export sector. The ECB’s rate-tightening cycle, aimed at curbing high inflation, has also dampened economic activity. Lagarde & Co. have a tricky task in charting out a rate path. If rates remain too low, inflation will remain well above the 2% target. However, too much tightening raises the risk of tipping the weak eurozone economy into a recession. Lagarde has a difficult decision to make and the markets are uncertain as well – ECB rate odds for the September meeting are around 50-50 between a hike or a pause. Harker says Fed could be done Investors are anxiously awaiting Jerome Powell’s speech at Jackson Hole later today. Meanwhile, Philadelphia Federal Reserve Harker made headlines on Thursday when he said that the Fed may have reached the end of its current rate-tightening cycle. Harker said that he didn’t see a need to raise rates further “absent any alarming new data between now and mid-September”.   At the same time, Harker stressed that he expected rates to remain at high levels for “a while” and ruled out rate cuts anytime soon. This was a pointed message to the markets not to assume that rate cuts are just around the corner.  I expect Fed Chair Powell to be even more cautious in today’s speech, perhaps with a reminder that inflation remains above target and that the door is still open to further tightening.   EUR/USD Technical There is resistance at 1.0893 and 1.0940 EUR/USD has support at 1.0825 and 1.0778    

EUR: Focus on the eurozone August CPI Flash August CPI data for the eurozone is released at 11:00 am CET today and is expected to show a gradual decline in both headline and core YoY readings to 5.1% and 5.3%, from 5.3% and 5.5% respectively. However, the decline is proving gradual and we are actually starting to see expectations of one more rate hike from the European Central Bank firm up a little. These peak at around 21bp of tightening priced in for January next year. Our macro team feels that the chances of a September rate hike are under-priced (now a 43% probability) meaning that EUR/USD could get a little support from the ECB story over the coming weeks. Today, also look out for a 09:00 am CET speech from ECB hawk Isabel Schnabel, speaking at a conference on 'Inflation: Drivers and Dynamics'. We will also see the ECB minutes for the July policy meeting released at 1:30 pm CET. EUR/USD has turned a little more bid over the last few days as US jobs data has softened the front end of the US yield curve and sticky inflation has kept EUR short-dated interest rates supported. Our short-term Financial Fair Value model sees EUR/USD fairly priced near 1.0900 - suggesting a probably range-bound session into tomorrow's US NFP release. Elsewhere, we note that Switzerland is planning some new large-scale Anti Money Laundering measures for 2024. This may be a slow-burn story, but one which may ultimately weigh on the Swiss franc in 2024.

JPY: Where is the alarm? USD/JPY has quietly drifted into the 145-150 intervention zone without triggering many alarm bells in Tokyo. One difference between now and the intervention period last September and October is that FX conditions are much more orderly. For example, one month USD/JPY implied volatility is trading near 9% today versus levels in the 14-15% region during Japanese FX intervention last year.  At the same time, there is no sense of a 'sell Japan' mentality emerging, and Japanese authorities may actually tolerate a softer yen given the deflationary forces emerging from China and the weak export markets in Asia and Europe. Unless we see some financial shock that triggers an unwind of the carry trade, it looks as though USD/JPY can hang around this 145/150 region longer than we had originally forecast. A decisive turn lower may have to wait until the late September and October period when more evidence of a US slowdown should have emerged and speculation will be growing over a Bank of Japan policy change at the meeting in late October.

GBP: Table top mountain The UK rates curve softened by 9-10bp yesterday on comments by Bank of England Chief Economist Huw Pill, that the policy rate profile would look more like a "table mountain" – the inference here is that high rates would be kept for longer than the need to take rates much higher per se. However, the market still prices another 50bp of tightening into next year, which is 25bp too much in our opinion. The risk of re-pricing looks greater for the BoE than the ECB curve and keeps us positive on EUR/GBP. Levels in the 0.8500/8550 area should be good for corporates to hedge GBP receivables or EUR payables.  

MXN: Banxico expressing a view over a strong peso Unlike Chinese authorities which are battling renminbi weakness and cut the FX deposit required reserve ratio last night, Mexican authorities are seemingly expressing a view that the peso is too strong. Here USD/MXN spiked more than 2% last night after Banxico announced that it would allow its "hedge book" or short USD/MXN position in the FX forward market to roll off rather than be extended.  By way of background, Banxico has intervened to support the peso during two periods (February 2017 and March 2020) and has done this by auctioning dollars through the FX forward markets using one-month to 12-month tenors. The total size of those positions is now around $7.5bn. Banxico announced yesterday that it would allow this position to roll off gradually, effectively over the next 12 months. Investors have read this as Banxico expressing a view that the peso has come far enough. And given the peso has been a prime beneficiary of the carry trade, we should not underestimate the risk of a further correction higher in USD/MXN ahead of this long US weekend. Yet USD/MXN has traded below 17.00 for very good reasons, including high carry and nearshoring trends. And given our view that the dollar does turn lower next year, we see the Banxico move as slowing rather than reversing the USD/MXN trend. Two further quick points: returns on the MXN carry trade may now come more from carry than nominal MXN appreciation, and speculation may grow in the TIIE market (Mexican swap curve) that Banxico may prefer early rate cuts after all if it does not want its currency to strengthen much more.

Peso positives remain in place Physically it looks like the majority of this hedge unwind will hit the USD/MXN market in September. However, the hedge unwind does nothing to reduce one of the key driving factors of peso strength this year – which is the risk-adjusted carry. Even Banxico in its meeting minutes highlights how the risk-adjusted yield is the dominant force in driving the peso. As we highlight below, the peso offers the higher carry-to-risk ratio in the EM space. This is the nominal implied yield available through the deliverable/non-deliverable FX forward market, adjusted by implied volatility from the FX options market. Unless Banxico plans to slash nominal rates or engineer some local factor that would command significantly higher implied volatility for USD/MXN, then this carry-to-risk ratio will remain a major boon to the peso.   EM currencies 'carry-to-risk' ratio and YTD performance versus USD   On the subject of potential rate cuts, it was noticeable that the Mexican TIIE swap curve barely budged on this announcement. If the FX market thinks Banxico may potentially even want to cut rates to put a floor under USD/MXN, the rates market is not buying the story. And Banxico this week has, in fact, said it will not be rushed into early rate cuts. Recall that Banxico had kept policy rates 600bp+ over the Fed to keep USD/MXN stable. We would be more worried for the peso if Banxico did threaten large, early rate cuts. New FX policies from central banks?     We tend to view this as more a commercial and financial stability-led decision from Banxico rather than a formal red flag to further peso strength. As an aside, Brazil’s central bank – the BCB – has a $100bn short USD/BRL position through the FX forwards following intervention and probably would not go near unwinding it for fear of crashing the Brazilian real. Chile’s central bank happens to be buying FX at the moment – but that looks a function of financial stability as it tries to rebuild FX reserves after losing half of them last year. In short, we do not think Banxico’s move is part of an effort to cap the strength in Latin currencies. Instead, we think Mexico’s high carry, decent growth, strong sovereign position and positioning for geo-political nearshoring should mean strong demand for the peso on any weakness this month. Additionally, foreign positioning in Mexcio’s local currency MBONO bond market is not particularly extreme; Mexico should be well positioned to receive funds when bond markets eventually come back into favour given its large 10% weight in the JPM GBI-EM local currency bond index. We currently forecast USD/MXN trading down through 16.50 next year when the broad dollar turns lower on a larger-than-expected Fed easing cycle. We do not think this Banxico announcement necessitates a forecast change, and the peso will comfortably outperform its steep forward curve.          Non-resident holdings of Mexican government securities  

The 2% of GDP slippage in the budget will be addressed in September The Hungarian budget posted a deficit of HUF 44.3bn in July, bringing the year-to-date cash flow deficit to 86% of the full-year target. The decline in domestic demand is weighing heavily on tax revenues. In this respect, VAT receipts in the first seven months of 2023 were only 1.5% higher than a year ago, compared to an average inflation of 23.2% in this period. We see a 2% of GDP slippage in this year's budget, which is likely to be addressed by a combination of consolidation and an upward revision of the target after the expected September revision. We see the EDP deficit target being raised by 0.5ppt to 4.4%, while a number of austerity measures are likely to be announced. From a financing perspective, the financing needs   Budget performance (year-to-date, HUFbn)   We believe the forint will benefit from the retuned hawkish message Since the beginning of August, the Hungarian forint has strengthened versus the euro from levels above 390 to below 380. This has happened despite the fact that the "higher for longer" narrative has gained momentum in the US, which has kept the dollar firmly bid. Not to mention the uncertainty surrounding the Australian LNG strikes, which caused volatility in gas prices. However, the forint seemed to shrug off these headwinds and closed the month with a gain of around 2.5% against the euro. Going forward, we remain constructive on the overall outlook for the HUF. As the central bank has reined in excessive rate cut expectations, the relative carry opportunity has definitely improved. In this respect, the forint can maintain its very attractive carry, the highest in the Central and Eastern European region and leads the emerging markets space despite 400bp of cuts so far. The NBH will carry out the second phase of monetary policy normalisation in such a way that HUF assets will be supported by the highest real interest rates in CEE. In addition, the country's external balances have improved significantly due to the slump in domestic demand, and we now expect the current account to post a full-year surplus. Taking these factors into account, we still believe that the forint can strengthen back to the 370 level against the euro by the end of this year. But the road there will be bumpy, with many red flags waving, from the fate of EU funds to the outcome of this year's budget review to the decisions of credit rating agencies.   CEE FX performance vs EUR (30 December 2022 = 100%)

Canadian growth shocker confirms central bank to pause Canada’s economy surprisingly contracted in the second quarter with consumer spending slowing sharply and residential investment collapsing. Together with a cooling labour market, this should ease the Bank of Canada's inflation fears and lead to a no-change decision on 6 Sep. Still, the USD/CAD rally appears overdone, and we expect a correction soon.   We expect a pause this week Ahead of last Friday’s data, analysts were favouring a no-change outcome with just three out of 32 economists surveyed by Bloomberg expecting a 25bp interest rate increase while overnight index swaps suggested the market saw only a 15% chance of a hike. This was despite headline inflation surprising to the upside in July and the BoC signalling at the July policy meeting that it continued to believe inflation would only return to 2% by mid-2025 and that the door remained open to further hikes. The GDP numbers and the manufacturing PMI that we got on Friday have only cemented the no-change expectation. Markets are now pricing little more than a 1% chance of a hike after the economy contracted 0.2% annualised in 2Q versus expectations of a 1.2% increase while 1Q GDP growth was revised down from 3.1% to 2.6%. Consumer spending rose just 1% annualised while residential investment fell 8.2% to post a fifth consecutive substantial contraction. Net trade was also a drag, but there was at least a decent non-residential investment growth figure of 10.3%. Meanwhile, the manufacturing PMI slipped to 48.0 from 49.6 to post its fourth consecutive sub-50 (contraction) reading.   Canadian unemployment and inflation   Given the economy lost jobs in July we completely agree that the BoC will leave rates unchanged this month after having resumed hikes in June and July following a pause since January. Nonetheless, the BoC is likely to leave this as a hawkish hold given that policymakers are yet to be fully convinced they’ve done enough to return inflation sustainably to 2% given the recent stickiness seen. At a bare minimum, we will get a messaging of rates staying “higher for longer”, but given the perilous state of the Canadian property market and signs of spreading weakness globally, we do expect rate cuts to come onto the agenda by March next year.   CAD weakness not justified USD/CAD has rallied 3% since the start of August, broadly in line with the general strengthening in the US dollar, but in contrast with short-term USD:CAD rate differential dynamics. While USD/CAD rose in the past month from 1.32 to 1.36, the USD:CAD two-year swap rate differential was relatively stable in the -50/-40bp range throughout August, and only tightened to -30/-35bp after Canada’s poor 2Q GDP report.   Our short-term valuation model, which includes swap rate differentials as an endogenous variable, shows that USD/CAD is trading more than 2% over its fair value, a rather unusual mis-valuation level for the pair. Incidentally, CFTC data shows that speculators have moved back into bearish positioning on the loonie in recent weeks, with net-shorts now amounting to 9% of open interest.   USD/CAD is overvalued   We don’t expect the BoC to turn the tide for CAD, but the recent weakness in the loonie appears overdone, and technical indicators suggest a rebound is on the cards. We still expect USD/CAD to end the year close to 1.30 as CAD should benefit from the most attractive risk-adjusted carry in the G10, even without any more hikes by the BoC.    

RBA expected to pause US nonfarm payrolls rise slightly to 187,000 The Australian dollar has started the week with slight gains. In Monday’s European session, AUD/USD is trading at 0.6464, up 0.21%.   RBA expected to pause The Reserve Bank of Australia is expected to hold interest rates at 4.10% when it meets on Tuesday and a rate hike would be a huge surprise. The central bank has paused for two straight meetings and the odds of a third pause stand at 86%, according to the ASX RBA rate tracker. The most important factor in RBA rate policy is of course inflation. In July, CPI fell to 4.9% y/y, down from 5.4% y/y and better than the consensus of 5.2% y/y. Inflation is moving in the right direction and has dropped to its lowest level since February 2022. A third straight pause from the RBA will likely raise expectations that the current rate-tightening cycle is done but I don’t believe we’re at that point just yet. This is Governor Lowe’s final meeting and he is expected to keep the door open to further rate hikes. Incoming Governor Bullock stated last week that the RBA “may still need to raise rates again”, adding that the Bank will make its rate decisions based on the data. The RBA isn’t anywhere near declaring victory over inflation and has projected that inflation will not fall back within the 2%-3% inflation target until late 2025.   The week wrapped up with the US employment report for August. The Fed will be pleased as nonfarm payrolls remained below 200,00 for a third straight month, rising from a revised 157,000 to 187,000. Wage growth fell to 0.2% in August, down from 0.4% in July and below the consensus of 0.3%. The data cements a rate hold at the September 20th meeting, barring a huge surprise from the CPI report a week prior to the rate meeting. . AUD/USD Technical AUD/USD is testing resistance at 0.6458. Above, there is resistance at 0.6516 There is support at 0.6395 and 0.6337    

CAD: An unsurprising pause by the Bank of Canada today USD/CAD printed the highest level since March yesterday, briefly breaking above the 1.3660 April high following another round of USD strengthening and generalised softness in pro-cyclical currencies. We don’t expect today’s Bank of Canada meeting to be a turning point for the loonie, as policymakers should take into account the recent weakness in growth and the cooling labour market and opt for a pause – here is our full preview. The dovish move in market expectations has already happened and markets are expecting no change today, while a modest 9bp is left in the CAD OIS curve before year-end. This means that the downside risks for CAD from today’s pause should be limited, also because the BoC will likely want to avoid categorically closing the door to more tightening just yet. The rise in USD/CAD in the past month has not been mirrored by a divergence in the USD/CAD short-term divergence of similar magnitude, and the pair is currently 2.5% overvalued according to our short-term fair value model. While a turn in US activity data likely remains necessary to pull the trigger on a USD correction and close the mis-valuation gap, we think that further USD/CAD gains will prove increasingly unsustainable. A retracement to the 1.3460 200-day MA is our preferred bias for September.

Hawkish hold from the Bank of Canada, but we think rates have peaked The BoC left the policy rate at 5% but warned that with inflation pressures remaining elevated it could yet hike again. We don’t think they will need to as high borrowing exposure and lagged effects of policy tightening increasingly weigh on an economy that is already showing some cracks. The negative implications for CAD are, however, limited.   BoC leaves the door open for more Having resumed hikes in June and July following a pause since January, the Bank of Canada opted to leave interest rates unchanged today at 5%. This was the widely expected outcome with just two of 30 or so economists expecting a hike and financial markets barely pricing 2bp of potential tightening following data showing the Canadian economy contracted in the second quarter, the manufacturing PMI moved deeper into negative territory and the unemployment rate crept higher. This was acknowledged by the BoC with the accompanying statement recognising that the economy has “entered a period of weaker growth" and that labour market tightness "has continued to ease gradually". Yet inflation remains well above the BoC’s target and the statement mentioned "broad based" pressures, with rising gasoline prices meaning headline inflation is likely to stay higher than the BoC was forecasting in the near term. As such, we have a hawkish hold with the BoC prepared to hike again 'if needed". We think they won't need to and rates have peaked at these levels as high exposure to borrowing and the lagged effects of monetary policy tightening become increasingly apparent.   CAD steady after the announcement The loonie was little changed against the dollar after the Bank of Canada announcement today. However, CAD is trading firmer than most other G10 pairs as strong ISM figures out of the US sent USD higher against most pro-cyclical currencies. The CAD OIS curve after the meeting shows markets are pricing in around 10bp of tightening by the BoC, meaning that if we are right and the Bank does not hike rates again, the repricing lower in Canadian rate expectations should not materially hit the loonie. USD/CAD has plenty of room to correct on the back of rate-gap and commodity dynamics, but solid US activity data is likely to keep the pair supported in the near term. 

Swedish krona still searching for the bottom, but the Riksbank can help EUR/SEK is close to the 12.00 level, trading at historic highs as external and domestic factors have added pressure to the already weak krona. In the medium term, we have few doubts SEK can recover and converge with higher fair value, but the timing is highly uncertain, and will be more dependent on the global market environment than on Sweden’s economic woes.   Why it’s still hard to pick the bottom for the krona Back in May, we published a note entitled “Sweden: Hard to pick a bottom for the unloved krona”. More than three months later, it is still hard to pinpoint an end to the EUR/SEK rally, and the key drivers behind the strength in the pair have not changed materially. Back then, the Riksbank had just lifted the cap on the pair with a dovish surprise, and while it later attempted to restore a currency-supportive hawkish stance, markets have continued to price a good deal of domestic downside risk into SEK. In the broader FX picture, pro-cyclical currencies like SEK are primarily responding to US data at the current juncture: the recent resilience in activity indicators has kept market expectations for Fed easing capped, global rates elevated, the dollar strong and high-beta currencies under pressure. Remember how NOK and SEK emerged as the two biggest underperformers during the core of the Fed tightening cycle? As the higher-for-longer narrative in the US consolidates, investors are once again turning their backs on the illiquid Scandinavian currencies. And with Sweden facing domestic headwinds and the eurozone’s economic outlook deteriorating, EUR/SEK is trading at fresh highs, and at risk of touching the 12.00 pain level.         The Riksbank can cap krona weakness The chart below shows the risk premium (orange line) that has been built in for the krona (against the euro) since the start of the year. That tells us how much higher EUR/SEK is trading compared to what we estimate is its fair value according to market drivers (like rates and equities).       Despite perceived real estate concerns building steadily into the end of April, EUR/SEK traded close to its fair value thanks to the Riksbank’s currency-supportive hawkish tone. The shift in narrative at the April meeting (when two members voted against a 50bp hike, and the rate path was more dovish than expected) led to a spike in SEK undervaluation, which lasted for two months. Crucially, the return of a currency-supportive hawkish stance at the Riksbank’s June meeting saw the EUR/SEK mis-valuation drop to zero. The following build-up in the EUR/SEK risk premium was much more short-lived compared to the one in May-June, and primarily a consequence of the bond sell-off in the US.   So, what is this telling us? The Riksbank can still impact the krona substantially. Despite not being able to fully insulate a high-beta currency like SEK from external drivers, it can prevent it from trading below its short-term fair value. To do this, it must meet or exceed market expectations on future rate tightening (i.e. via rate path projections), which has the additional benefit of signalling that the Bank is not so worried about the economic outlook and the risks to financial stability as to overlook its inflation mandate and the need to stabilise the currency. Markets are fully pricing in a 25bp hike in September, with a 50% implied probability of another 25bp hike at the November meeting. The Riksbank will likely have to signal one more hike in its rate path projections to support the krona when it raises rates in September. Our SEK forecast: the question is timing, not direction One aspect of the lingering SEK risk premium is that it has detached from short-term rate dynamics, which had been a key driver until April/May last year. Based on the EUR:SEK two-year swap spread alone, EUR/SEK should be trading around 11.00 (chart below). In the current market conditions that is, obviously, inconceivable.     We continue to base our medium-term forecast on the evidence that the krona is significantly undervalued, both against the euro and the dollar. On the back of this, our forecast profile for EUR/SEK is downward-sloping for 2024, and we expect the pair to trade below 11.00 by next summer. We must admit, however, that the timing of the SEK recovery remains quite uncertain. In our view, this is not excessively dependent on domestic factors; the krona is already pricing in a sizeable amount of weakness in the domestic economy, and markets will either see the most dramatic scenarios for the real estate sector materialise (not our base case) or will have to price them out of the krona next year. Missteps by the Riksbank, if anything, have a higher chance of causing FX damage.   External drivers hold the key to the recovery We think, instead, that SEK’s reconnection with its stronger fundamentals will be driven by the global FX narrative. A strong dollar on the back of higher-for-longer rates in the US is incompatible with a recovery in the krona. The past few months have been a clear testament to this. We expect US activity data to start turning from 4Q23, and the Federal Reserve to start cutting from March 2024, and that is the window when pro-cyclical currencies like SEK can stage a good rebound. However, we admit that the resilience in US economic data could persist for longer than we estimate, and delay as well as reduce the scope of the recovery in pro-cyclical currencies. A further deterioration in the eurozone growth outlook can also make the krona’s recovery harder.   Until a US data/dollar turn occurs, the krona will remain vulnerable, and we only see 12.00 as the really strong resistance level for EUR/SEK. So far, the Riksbank has ruled out FX intervention but might start throwing that idea around to gauge market reaction (the effective applicability remains doubtful) should we break above the 12.00 mark. We see room for a SEK rebound around the Riksbank’s upcoming meeting when we expect the SEK-supportive narrative to prevail and a good chance of another hike to be added to the rate path. EUR/SEK could be easing back to 11.70 by the end of September.

GBP: BoE dovish comments hit the pound EUR/GBP has experienced a good rally in the past two sessions, now trading at around 0.8580 on the back of dovish comments by Bank of England members. Yesterday, BoE Governor Andrew Bailey stressed the downside potential of UK inflation and said that rates were likely near the top of the cycle. He was joined by two other MPC members at the Parliament testimony, Jon Cunliffe and Swati Dhingra, who also stressed inflation is at a turning point and gave few reasons to suggest multiple more hikes are on their way. It appears that the BoE may be transitioning to a higher-for-longer narrative. Markets are now for the first time starting to cast some doubts about whether the BoE will hike rates at all at the 21 September meeting, with pricing having dropped below 20bp after yesterday’s Parliament testimony. For now, our base case is that they will go ahead with a hike but that it will be the last one, meaning markets will have to price out the additional hike still priced for later this year. EUR/GBP upside potential remains decent in our view. Today, keep an eye on the BoE decision-making panel survey and on any evidence of abating inflationary pressure.

FX Daily: Resistance to dollar strength is futile The dollar remains well-bid across the board as a relentless run of above-consensus US data suggests the Federal Reserve will be in no mood to relax its hawkish stance. Resistance to the strong dollar is crumbling - most notably in China where a higher USD/CNY fixing suggests the People's Bank of China is becoming more tolerant of renminbi weakness.   USD: No reason to unwind dollar longs The dollar is consolidating near the highest levels since March as US data continues to surprise on the upside. Following the above-expected ISM Services index on Wednesday, yesterday it was the turn of the weekly initial jobless claims to drop back to the lowest levels since February and question the narrative that tightness in the US labour market is easing. With activity data staying strong, it seems the market may be more minded to buy into the idea of another 'skip' - i.e. the Fed not hiking in September but hiking again later in the year. Clearly, this pushes the idea of a Fed easing cycle later and keeps the dollar stronger for longer. As has been the case so often, the dollar is the United States currency and everyone else's problem. Here, both Japanese and Chinese officials are fighting against dollar strength - with limited degrees of success. Japanese officials are sounding like we could well see intervention shortly - e.g. in the 148-150 window in USD/JPY. The highlight of the overnight session, however, has been the People's Bank of China (PBoC) allowing a higher fixing in the onshore USD/CNY. They have maintained the spread of the fixings to the model-implied fixings of around 1100 CNY pips, but the higher fixing has put paid to ideas that Chinese officials have some kind of line in the sand for USD/CNY at 7.35. USD/CNH is currently trading above that level. Low Chinese CPI next week and a PBoC rate decision with the one-year lending rate will keep expectations alive of further rate cuts too. The weaker CNY/CNH will continue to keep EM FX broadly offered and the dollar bid. There is very little in the way of US speakers or US data today. The weekend sees a G20 meeting in New Delhi, with much focus on how new alliances develop following the recently announced expansion plans of the BRICS.  We cannot see investors wanting to offload dollar balances anytime soon. This suggests DXY stays bid near 105.00.

British pound falls to 3-month low against US dollar UK house prices fall sharply BoE’s Bailey is non-committal about September rate decision The British pound has extended its losses on Thursday. In the North American session, GBP/USD is trading at 1.2472, down 0.28%. Earlier, the pound touched a low of 1.2445, its lowest level since June 8th. The pound has been unable to find its footing and has posted five losing sessions in the past six, falling 250 basis points during that span. UK housing data disappoints UK house prices continue to fall and posted a decline of 1.9% in August, the steepest drop since November 2022, according to the Halifax Bank of Scotland. The Halifax report noted that house prices have been resilient this year in the face of rising interest rates, but the lag effect of rate hikes may be making itself felt through higher mortgage costs. This week’s UK PMI releases highlighted the weakness of the UK economy and have pushed the wobbly pound lower. The Services PMI for August was revised higher to 49.5 from 48.7, following a July reading of 51.5 points. This marked the first decline in services business activity since January. This was followed by the Construction PMI, which decelerated and barely remained in expansion territory at 50.8, down from 51.7 in July. The manufacturing sector has been woeful, and last week’s PMI dipped to 43.0 in August, down from 45.3 in July.   With the struggling UK economy as the background, Governor Bailey said on Wednesday that it was “much nearer” to ending the current tightening cycle, but added that the BoE might have to raise rates further due to persistently high inflation. Bailey remained non-committal about the September 21st meeting, but the markets are confident that the Bank will deliver a quarter-point hike, with a probability of 82%. . GBP/USD Technical GBP/USD pushed tested support at 1.2449 earlier. Below, there is support at 1.2335  There is resistance at 1.2519 and 1.2633      

Instead of declining, the US ISM Services PMI rose to 54.5 in August from 52.7 in July. The report recorded growth in all key parameters – employment, new orders, and even prices. Apparently, increased levels of consumer spending had become the main reason for the rise, but the question of whether consumer activity will remain high in the coming months remains debatable. The US ISM data contrasts with the rest of the world, as similar gauges in China, the eurozone, and the UK, showed a decline, and the market interprets the results in favor of the US dollar.   Take note that the final reading from S&P Global Business on the US services sector PMI was slightly lower than the preliminary one - 50.5 vs. 51.0, which sharply contradicts the ISM readings. This imbalance will be resolved next month. The Federal Reserve's Beige Book showed that economic and labor market growth slowed in July and August, while many businesses expect wage growth to slow down in the near future. Here, too, we see a discrepancy with the ISM assessment, especially in light of the Fed's policy of restraining consumer demand as one of the key factors in inflation.   The GDPNow model estimate for real GDP growth by the Federal Reserve Bank of Atlanta in the third quarter of 2023 is 5.6 percent on September 6. Take note that this is a very high figure.   In summary, the general fundamental story suggests that the US is still a bit stronger compared to the rest of the world, and this will be the catalyst for the dollar strength, which remains the primary favorite in the currency market.   USD/CAD As anticipated, the Bank of Canada held its key overnight interest rate unchanged at 5%. Therefore, changes in policy are deferred to the next meeting on October 26, where, among other things, forecasts will be updated. In the accompanying statement for the July 12 meeting, it was stated that the rate was raised due to accumulation of evidence that excess demand and elevated core inflation have proved to be persistent. This time, the wording has been changed to a more neutral tone: "With recent evidence that excess demand in the economy is easing, and given the lagging effects of monetary policy...". This implies that the BoC believes that the measures taken earlier are yielding results and no changes are needed. Only time will tell whether this is really the case, but one thing is clear – the Canadian dollar has become more susceptible to further weakness. At least, concern about the persistently high core inflation was specifically emphasized. At the moment, the probability of a rate hike in October is estimated at 25%, which is too little for a bullish revision of CAD forecasts. The net short CAD position increased by 0.3 billion to -1.2 billion over the reporting week, indicating bearish positioning. The price is significantly above the long-term average, and there are no signs of a reversal. USD/CAD continues to gradually rise. The pair has reached the nearest target that we mentioned in the previous review, and it appears that it will eventually test the upper band of the 1.3700/20 channel. It is likely for the pair to break above the channel, with 1.3857 as the medium-term target. From a technical perspective, after testing the upper band of the channel, we can expect a retracement towards the channel's midpoint. However, fundamental indicators suggest further growth.      

ECB may be a lifeline not a trampoline for EUR/USD September’s ECB meeting will be a binary risk event for the euro. Our baseline scenario sees a rate hike, which would translate into a stronger euro in the aftermath of the announcement, as market pricing is leaning in favour of a hold. But with EUR/USD having been on a steady bearish path since the 1.12 July peak, the real question is whether a hike would invert the trend. The short answer is probably not, but there are some important considerations to make. First of all, it’s worth explaining why we think the FX impact of an ECB hike will be short-lived. One key reason is pricing: markets have doubted the ability of the ECB to hike this week (9bp priced in), but are still factoring in a total of 17bp of tightening to the peak by year-end. Arguably, the ECB hawks won’t have much interest in delivering one hike this week and striking a dovish tone, as the effective tightening via rates would be limited, so they should accompany a hike with openness to do more. However, with economic conditions deteriorating fast in the eurozone and dovish dissent within the ECB growing, it will be hard to convince markets to price in any additional tightening. When we look at the 2-year swap rate spread between the euro and the dollar, an important driver of currency fluctuations, we can tell that it has recently approached the -125bp support level (five central bank “lengths” between the Federal Reserve and ECB). Let’s remember that the swap rate tells us the expected average rate for the next two years, so includes expectations for the final moves in the tightening cycle (if any) and rate cuts. What has really driven the recent widening of the spread in favour of the dollar has not been any repricing higher in Fed rate hike expectations, but a downsizing of easing bets in the US for next year.   EUR/USD and short-term swap spread     With rate hike cycles coming to an end, swap rates are increasingly sensitive to expectations about the timing and pace of easing cycles. Those expectations are, however, far less controllable by central bank communication, and much more dependent on data. But can the ECB at least show signs of a united hawkish front and convincingly push back against rate cut speculation? (The first ECB cut is priced in for July 2024). If it can, then you have a trampoline for a sustainable EUR/USD rebound, otherwise – and we really think this will be the case – the best President Lagarde can do for the euro is to offer a lifeline. One way the ECB could, however, end up having a longer-lasting FX impact is via an acceleration in quantitative tightening. However, that obviously comes with non-negligible risks to peripheral spreads, and policymakers may want to tread quite carefully in that sense.   After the short-term impact, EUR/USD should revert to being driven primarily by the dollar leg, or in other words by Fed rate expectations and US data. We still expect a turn higher in the pair, but patience is the name of the game for EUR/USD bulls like us, and more downside corrections even after a potential ECB hawkish surprise are a very tangible risk.

UK GDP falls by 0.5% GBP/USD dips slightly lower The British pound has edged lower on Wednesday. In the European session, GBP/USD is trading at 1.2472, down 0.17%. The pound fell as low as 1.2441 earlier today but has recovered some of those losses. UK economy contracts by 0.5% The UK economy contracted by 0.5% in July, the largest decline this year. The reading reversed the 0.5% gain in June and missed the consensus estimate of 0.5%. The GDP report pointed to weakness across the economy, with declines in services, manufacturing and construction. There’s no question that the sharp increase in borrowing rates has cooled the economy, but there’s uncertainty as to what action the Bank of England will take at the meeting on September 21st. The markets have priced in a quarter-point rate hike at 75%, which means there is a possibility of a pause in rate increases. The UK economy may already be in recession and another hike will put a further strain on the economy. On the other hand, the battle against inflation is far from over, and with inflation running at a 6.8% clip, the BoE will need to do more to bring inflation closer to the 2% target. The UK jobs report on Tuesday was a reminder that inflation is alive and kicking. The economy shed a massive 207,000 in the three months to July, as the labour market is showing larger cracks. However, wage growth including bonuses hit 7.8%, unchanged from a month earlier and the highest on record. Wages are now rising faster than consumer inflation, which is one more headache for the Bank of England, which had a rough time in its attempts to bring down inflation.   GBP/USD Technical GBP/USD is testing support at 1.2459. Next, there is support at 1.2395  There is resistance at 1.2519 and 1.2592  

Czech National Bank preview: Last meeting before first rate cut The CNB is starting to discuss the possibility of cutting rates and we believe that conditions will allow the first cut as early as November. In any case, the board will want to stay on the cautious side, and the tone of the press conference will reflect that. However, the CNB has little to offer from its hawkish arsenal given that a cut is only a matter of time now.   The debate on rate cuts begins The Czech National Bank (CNB) will hold its monetary policy meeting next Wednesday, which we believe will be the last one before the vote on cutting rates. This time there will be no new central bank forecast and the board will only discuss an internal update on the situation. For now, it seems that the CNB is happy with the numbers coming out of the economy. Economic growth was slightly above expectations in the second quarter, on the other hand, wage growth and headline and core inflation are below the central bank's forecast. Only EUR/CZK is pointing in an inflationary direction with weakening after the August CNB meeting, and more recently after the National Bank of Poland's (NBP's) surprise decision (of a 75bp rate cut) in early September. However, the CNB was expecting this direction, and based on recent communication we believe FX is not a game-changer.   Board members have already indicated that the September meeting will be used to discuss the rate-cutting strategy, so we could see some details from this discussion. In any case, the CNB will try to sell future rate cuts with a hawkish and cautious tone. However, we doubt that the central bank has anything more to offer from its hawkish arsenal to the markets, especially in the context of the current shift in market expectations towards a later rate cut. Moreover, the central bank's recent moves – the end of the FX intervention regime and the easing of capital and mortgage requirements – indicate a dovish bias of the board.   First rate cut in November Our forecast remains unchanged – the first 25bp rate cut in November along with a new central bank forecast. Of course, the risks here are clear. The central bank could wait for the January inflation number and cut rates at the start of next year. However, we believe that the combination of faster-falling inflation, weak economic numbers and FX at current or stronger levels will be a reason for the board to cut rates in November and avoid too much monetary tightening and inflation near the target in January. Looking ahead, we don't expect there to be more than two 25bp rate cuts (in November and December) before the January inflation number is released (after the February meeting). Further down the line, however, we expect the CNB to gradually increase the pace of cuts if the numbers confirm inflation is near the 2% target.   What to expect in FX and rates markets In the FX market, the Czech koruna suffered a depreciation after the end of the CNB's exchange rate regime in August and the NBP's surprise rate cut in September. In particular, due to the spillover shock within the region in the last few weeks, we believe EUR/CZK should be lower and are slightly positive on the CZK. This should be supported by the CNB's cautious tone next week. Of course, EUR/CZK levels will play a key role in the November decision and we believe the pain threshold for the CNB to delay rate cuts until the first quarter of next year is 25.0 EUR/CZK. In the rates market, we see the pricing of rate cuts in the short term, within two years, as more or less fair. If anything, we see less chance of big rate cuts in the first quarter, as the market currently expects. On the other hand, we see the biggest mispricing at the long end of the curve, which has out-priced a CNB return to the 3% equilibrium rate level. Thus, the IRS curve now points to rates above 4% in the long term and we see room for downward repricing here once rate-cutting discussions begin next week. Czech government bond (CZGBs) yields have moved higher following the sell-off in core markets, which we believe opens up a good opportunity to benefit from a clearly positive outlook. On the supply side, MinFin is already limiting issuance as the year-end approaches and the better-than-expected state budget result. In addition, MinFin is now starting to frontload next year's needs through switches, confirming a comfortable situation with nearly 75% of the CZGBs plan covered. Thus, we see the current yield as attractive ahead of the materialisation of a massive supply drop next year and by far the best inflation profile in the CEE region followed by the CNB rate cuts. Thus, we like CZGBs both outright and in the spread versus the IRS curve, which should head into negative territory in the coming months, in our view.  

EUR: 1.0200 is the outside risk bottom In the article mentioned above, we estimate that an extension of the run in US treasury yields to the 5.0% mark would take EUR/USD to 1.02. That is not our base case, but the ongoing pressure on the euro is clearly not confined to the US rates story. The ongoing re-rating of growth expectations in the eurozone has ultimately come through to the FX market and taking a toll on the common currency. Developments in the US activity story remain much more important, and if signs of weakness emerge across the Atlantic (and markets price in more Fed tightening) we expect a swift turnaround in EUR/USD, but that may not be a story for the near-term. Holding at the key 1.0500 support will be a success for those hoping for that turnaround to happen anytime soon. Today, the eurozone calendar is light until tomorrow’s CPI figures start to come in, and there are no scheduled European Central Bank (ECB) speakers after Austrian hawk Robert Holzmann said it was unclear whether the peak in rates had been reached yesterday. Across the British channel, the economic calendar is also looking empty today, with no scheduled central bank speakers. We continue to flag downside risks to the 1.2000 area in Cable, while EUR/GBP may struggle to hold on to recent gains as sterling’s recent underperformance relative to the euro starts to look a bit overdone now that the big bulk of the Bank of England repricing has happened.

Gauging EUR/USD downside risks in a bearish bond market We estimate that further US bond weakness and 10-year Treasury yields hitting 5.0% would bring EUR/USD to the 1.02 area. While near-term upside risks to back-end yields are non-negligible, short-term USD swap rates should be more capped given a smaller pricing/dot plot gap compared to last June. Our medium-term baseline remains bullish for EUR/USD.   10Y Treasuries at 5% can bring EUR/USD to 1.02 Our colleagues in rates strategy argued in this piece that 5.0% 10-year US yields are no longer a remote possibility. The higher-for-longer Federal Reserve narrative that has been supporting the dollar recently has been mirrored in higher treasury yields, and the implications for the FX market are tangible. We simulated a scenario where the 10-year Treasuries hit 5.0%, based on the past year of EUR/USD coefficients. We estimate the pair would be trading around 1.02 with 5.0% 10Y yields. That would be an approximate 3.5% drop from current levels, the same kind of depreciation observed in the period when UST 10Y yields rose from 4.0% to the current 4.50% levels (EUR/USD sliding from 1.10 to 1.06).   EUR/USD and Treasury yields Dashed lines are ING estimations in a 5.0% UST 10Y scenario        

The AUD/USD pair is stuck in the 0.6380-0.6450 range. In general, the current fundamental background allows bulls to expect new price gains, if not for one "but" – the greenback. The US dollar's position is quite strong, and this serves as an obstacle to the development of an upward movement. However, AUD/USD bears are also unable to take advantage of the greenback's strength: as soon as the pair declines into the 63-figure area, sellers take profits, thus impeding the bearish momentum.   In other words, the pair is in a deadlock situation. To develop an upward movement, buyers need to overcome the level of 0.6450 (the Tenkan-sen line on the daily chart), and in order to restore the downtrend, sellers need to push through the support level of 0.6370 (the lower Bollinger Bands line on the same timeframe). Both are challenging tasks, given the current fundamental picture. Traders need a strong informational impetus that will push the pair out of the range – either to the south or to the north. The Federal Reserve's hawkish stance is on the greenback's side. The results of the latest Fed meeting supported the US currency. The central bank updated its dot plot, indicating that it intends to raise interest rates once again by the end of this year, either at the November or December meeting.   Fed Chair Jerome Powell confirmed these intentions, citing the high level of inflation. However, Powell tied future central bank decisions to the dynamics of key inflation indicators. This is why the core Personal Consumption Expenditures Price Index, which will be published on Friday (September 29), may trigger strong volatility among dollar pairs. According to preliminary forecasts, this crucial inflation indicator is expected to decrease to 3.9% YoY, which is the lowest value since September 2021. In such a case, the dollar bulls may come under pressure because the likelihood of a rate hike in November will significantly decrease (at the moment, this probability is around 30%, according to the CME FedWatch Tool). Conversely, if the index starts to gain momentum and goes against forecasts, hawkish expectations regarding the Fed's future course of actions will increase. Take note that inflation could provide support to the aussie. In this case, we're talking about the Australian Consumer Price Index.   The inflation data for August will be published on Wednesday. The market forecast was for a 5.2% increase in the reported period. If the release comes in at least at the forecasted level (not to mention the "green zone"), the Australian dollar could receive significant support. The key point here is that the CPI has been consistently declining for the past three months, reaching 4.9% in July. If the CPI grows, it will be a "warning sign" for the Reserve Bank of Australia.   It's important to recall the main points from the recently published minutes of the RBA's September meeting. The text mentioned that the Board considered two scenarios: 1) a 25-basis-point rate hike; 2) keeping the rate unchanged. In the end, the majority of the RBA officials agreed with the arguments in favor of maintaining the status quo. However, simultaneously, the central bank emphasized that "some further tightening may be required" in the future if inflation proves to be "more persistent than expected." Clearly, the August CPI will be viewed by the market in terms of a potential RBA reaction. If the gauge exceeds expectations, buyers of AUD/USD will have an informational catalyst for an upward movement.     Do recall that the recent Australian labor data was also in favor of the aussie. Unemployment in August remained at the July level (i.e., at 3.7%), despite forecasts of an increase to 3.9%. The employment figure also grew significantly, reflecting an increase of almost 65,000, while the forecast was for an increase of only 26,000. The labor force participation rate increased to 67.0%, which is the highest result in the history of these observations. In addition, Australia's GDP data, which was published in early September, also supported the aussie, although the report was somewhat contradictory.   The country's GDP increased by 2.1% year-on-year in the second quarter. On one hand, this figure shows a downtrend (the result for the first quarter was 2.4%, and for the fourth quarter of 2022, it was 2.6%). On the other hand, experts had forecasted a weaker result for the second quarter, around 1.8% year-on-year. Therefore, the Australian dollar may emerge in the near future.   If Australia's inflation report comes out in the "green zone" (or at least in line with forecasts), and the report on the core PCE index comes out in the "red zone" (or at least in line with forecasts), buyers of AUD/USD may not only test the resistance level at 0.6450 (the Tenkan-sen line on the daily chart) but also approach the next price barrier at 0.6500 (the upper line of the Bollinger Bands indicator on the same timeframe). So, all eyes are on inflation!  

Czech National Bank review: Staying on the safe side The CNB decided to wait for the start of the cutting cycle due to concerns about the anchoring of inflation expectations, high core inflation in its forecast and possible spillover into wage negotiations. The December meeting is live, but we slightly prefer the first quarter of next year. Economic data will be key in coming months.   Rates remain unchanged for a little longer The CNB Board decided today to leave rates unchanged despite expectations of a first rate cut. Five board members voted for unchanged rates at 7.00% and two voted for a 25bp rate cut. During the press conference, Governor Michl justified today's decision on the continued risk of unanchored inflation expectations, which may be threatened by the rise in October inflation due to the comparative base from last year. This could seep into wage negotiations and threaten the January revaluation, according to the CNB. At the same time, the board still doesn't like to see core inflation near 3% next year. So overall, it wants to wait for more numbers from the economy and evaluate at the December meeting, which the governor said could be another decision on whether to leave rates unchanged or start a cutting cycle   New forecast shows weaker economy and more rate cuts The new forecast brought most of the changes in line with our expectations. The CNB revised the outlook for GDP down significantly and the recovery was postponed until next year. Headline inflation was revised down slightly for this year but raised a bit for next year. The outlook for core inflation will be released later, but the governor has repeatedly mentioned that the outlook still assumes around 3% on average next year. The EUR/CZK path has been moved up, but slightly less than we had expected. 3M PRIBOR has been revised up by a spot level from the August forecast, implying now the start of rate cuts in the fourth quarter of this year and a larger size of cuts next year. For all of next year the profile is 30-65bp lower in the rate path, indicating more than 100bp in cuts in the first and second quarter next year.   New CNB forecasts   First cut depends on data but a delay until next year is likely Today's CNB meeting did not reveal much about what conditions the board wants to see for the start of the cutting cycle and given the governor's emphasis on higher inflation in the next three prints, we slightly prefer February to December. The new inflation forecast indicates 8.3% for October and levels around 7% in November and December. The last two months seem too low to us, but given the announced energy price cuts, this is not out of the question. So this is likely to be a key indicator looking ahead as to whether or not it will give enough confidence to the board that inflation is under control. Another key question is whether the CNB will move up the date of its February meeting so that it has January inflation in hand for decision-making.   What to expect in FX and rates markets EUR/CZK jumped after the CNB decision into the 24.400-500 band we mentioned earlier for the unchanged rate scenario after the decision. For now, the interest rate differential does not seem to have changed much after today's meeting, which should not bring further CZK appreciation. On the other hand, the new CNB forecast showed EUR/CZK lower than we expected and the board seems more hawkish. Therefore, we could see EUR/CZK around these levels for the next few days if rates repricing remains roughly at today's levels. However, we expect pressure on a weaker CZK to return soon as weaker economic data will again increase market bets on a CNB rate cut, which should lead EUR/CZK to the 24.700-24.800 range later. In the rates space, despite the high volatility, the market did not change much at the end of the day. The very short end of the curve (FRAs) obviously repriced the undelivered rate cut, however the IRS curve over the 3Y horizon ended lower, resulting in a significant flattening of the curve. The market is currently pricing in more than a 150bp in cuts in a six-month horizon, which in the end is not so much given the possible acceleration of the cutting pace after the January inflation release. Even though the CNB didn't deliver today's rate cut, we think the central bank is more likely to catch up with the rate cuts next year rather than the entire trajectory shifting. Therefore, we see room for the curve to go down, especially in the belly and long end.

EUR: No news is good news Perhaps helping the euro this week has been the lack of key eurozone data. Over the last couple of months, eurozone data releases have pulled the rug from under any emerging EUR/USD rally and have emphasised the pessimism in this trading bloc. Looking at the calendar, we cannot see any important releases until the November PMIs next Thursday. This suggests EUR/USD could hang onto this week's gains for a few more days.  We could see a 1.0800-1.0900 range develop over the next few days and certainly, a move back under the 1.0765 area would undo all of this week's positive developments. In terms of the bigger picture, we doubt EUR/USD will lead next year's dollar bear trend. And we favour benchmark cross rates, such as EUR/AUD to come lower. Before that, however, we currently forecast EUR/USD staying quite steady - not far from current levels - into year-end.

GBP: More downside room for EUR/GBP EUR/GBP continues to press the 0.8700 support after what has been a very eventful week in the UK. The tax cuts announced by the Treasury are, on paper, a sterling-positive. They are both pro-growth and pro-inflation and do not seem to have excessively unnerved the bond market – especially when compared to those announced previously under former prime minister Liz Truss. PMIs also came in stronger than expected yesterday, with the services and composite indices moving back above the 50.0 mark. Markets have priced out around 20bp of cuts in the September 2024 contract in the past week. We expect GBP to keep its decent momentum, especially in EUR/GBP, which we expect to make a decisive break below 0.8700 in the coming days. We are still expecting some USD resilience and see a capped upside for Cable.

EUR: Not easy to pick a bottom Shorting the euro appears to be one of the most popular bets in FX at the moment. Comments by hawkish hardliners like Isabel Schnabel yesterday – who suggested that another hike is now off the table and essentially moved the discussion to rate cuts – have added further pressure on the euro. We continue to point to how the current downward correction in EUR/USD is not out of line with short-term rate differentials; when taking the two-year swap rate gap (-130bp) as a driver, a further leg lower to the 1.06 area would not be an aberration. That makes us reluctant to call for the bottom in EUR/USD just yet, and even more so in EUR-crosses, especially against the likes of AUD and NZD. A catalyst for an idiosyncratic euro rebound is not in sight, at least for today, when there are no scheduled European Central Bank speakers and the eurozone’s data calendar only includes the October retail sales – hardly ever a market mover in the region. The big slump (7.3% YoY) in Germany’s factory orders for October (data released this morning) is likely to keep the negative euro narrative alive at the start of the European session. EUR/USD is now trading very close to the 1.0770 100-day MA support, and a break lower can further fuel the bearish momentum. A test of 1.0700 before the weekend is entirely possible if the dollar remains bid.

Cautious tone of Polish MPC Governor press conference The NBP president's conference was short and cautious in its tone. The NBP may be heading in the direction of the conservative Czech National Bank. In our view, rates will remain unchanged until at least March 2024   Weak global economy, signs of recovery at home During his press conference, the NBP Governor Adam Glapinski assessed that the data received since the previous MPC meeting does not fundamentally change the assessment of the economic situation and its outlook. The external environment remains weak. The Eurozone is in stagnation and activity in Germany is declining. In Poland, economic activity remains subdued, but there are increasing signs of recovery. After declines in 1H23, 3Q23 saw GDP growth of 0.5% YoY. According to. Glapinski, the economy is beginning to improve. Global inflation is subsiding but still remains elevated. Major central banks, including the Fed and ECB, are keeping interest rates unchanged.   The NBP expects continued CPI decline, but at a slower pace President Glapinski reiterated that inflation in Poland is falling and is on a path to the NBP target, which it should reach within two years. Glapinski reiterated how much inflation has fallen (it is almost three times lower than at the February peak), adding that the core is falling as well and is around 5pp down from the peak. He noted that the decline in inflation has slowed and will also be slower in the coming quarters. In the Council's view, inflation will continue to fall due to reduced economic activity (negative output gap) and earlier monetary tightening, which cooled activity in the credit market. Also favourable for the inflation outlook is the strengthening of the PLN by about 20% against the US$ and about 10% vs. the €. Professor Glapinski was very neutral on the PLN exchange rate.   Uncertainty prompts MPC to adopt wait-and-see stance The Governor’s statements indicate that the MPC is adopting a wait-and-see stance, but definitely not a hawkish one. The MPC is waiting for decisions on electricity and gas prices, as well as VAT on food, the reinstatement of which could bump up inflation by about 0.9ppt. Therefore, the Council should take a closer look at inflation prospects on the occasion of the NBP's March projection, when the aforementioned uncertainty factors should be resolved. The Council's subsequent decisions will depend on incoming data.   Bottom line A communications revolution at the NBP took place. Yesterday's decision was made earlier than usual, i.e. at 2:29 CET  and the Governor’s conference lasted only 27 minutes. Could it be that the NBP is heading in the direction of the (conservative) Czech National Bank? During his speech, Glapiński declared willingness to cooperate with the new government and flagged cautious rate decisions in the future. In our view, a more disinflationary external environment, a stronger PLN and a more cautious NBP suggest that the risk that inflation will remain above target for a long time has moderated somewhat. Rates should remain unchanged until the end of 2024 as there is still no shortage of inflationary factors. For instance, we expect further fiscal expansion, increased wage dynamics (i.e. due to a 20% increase in the minimum wage in 2024), large inflows of EU funds and foreign direct investment. But rate cuts cannot be completely ruled out either. The space for interest rate changes could emerge in March, should global disinflation prove rapid and sustained and the zloty continue to gain. Our baseline scenario assumes that interest rates will remain unchanged, but the distribution of risks is skewed toward potentially lower inflation and the chances of earlier interest rate cuts than in 2025.

December’s ECB cheat sheet: A reality check for ultra-dovish expectations The ECB will almost surely keep rates on hold at the December meeting. The question is to what extent it will align with the market's aggressive pricing for rate cuts in 2024. We suspect it will fall short of endorsing ultra-dovish expectations. There is some upside room for EUR rates and the battered euro.       Heading into the European Central Bank's December meeting, there is growing evidence that the Governing Council is split about the messaging being presented to markets. The generally arch-hawk Isabel Schnabel dropped strong dovish hints by ruling out rate hikes this week, and markets are now pricing in 135bp of cuts in the next 12 months. We see a good chance that the overall message at this meeting will fall short of endorsing aggressive rate cut expectations. Above are the market implications in various scenarios. Our full ECB preview can be found here. A still-cautious ECB may not validate aggressive front end pricing A reassessment of inflation expectations has been in the lead in driving rates lower and raising the expectations of first rate cuts at the end of the first quarter next year. From next summer onwards, market indications point to anticipated headline inflation fixes below 2%. Indeed, the 2Y inflation swap has dropped to 1.8%. It is easy to overlook that at the same time, core inflation is currently still running at an elevated 3.6% year-on-year, giving the ECB enough reason to remain cautious. However, the pushback against aggressive market pricing has been half-hearted at best, with officials’ remarks having put cuts in the first half of next year clearly into the realm of possibility. But whether they're likely is a different question. The ECB may well decide to let the data be the judge – but at the same time, it remains more reluctant to extrapolate to the extent that the market does. Its own inflation forecast may come down next week, but potentially not to the degree that markets are discounting. We see a good chance that the rally in front end rates – which currently discounts a 75% probability of a cut next March – stalls, if not unwinds to some extent. The longer end may see less upward pressure, though. In the extreme, the Governing Council coming across as overly hawkish and brushing off the faster disinflationary momentum could push markets into the belief that a policy mistake is in the making.   ECB rate expectations   Lagarde can throw a lifeline to the unloved euroThe idiosyncratic decline of the euro has been one of the key themes in FX lately, with the common currency being the worst-performing currency so far in G10. The aggressive dovish repricing of ECB rate expectations has been the main driver, and the comments by Isabel Schnabel right before the pre-meeting quiet period have fuelled the bearish narrative further. With 125bp of cuts priced in by October and markets actively considering a start to the easing cycle already in March, it's difficult to see a bigger dovish repricing happening at this stage. That would suggest the euro does not have to fall much further from the current levels. Still, if only short-term rate differentials are taken into account, a decline to the 1.06 area in EUR/USD would not be an aberration. What is already halting the euro slump is the upbeat risk sentiment, which favours pro-cyclical currencies like the euro and caps the upside for the safe-haven dollar. We expect the ECB to continue its transition to a dovish narrative, but that will – in our view – happen at a slower pace than what markets are implying. We see tangible risks that the the central bank will push back against aggressive dovish speculations at this meeting, and the market may be forced to unwind some of those rate cuts bets, offering room for a EUR/USD rebound. That said, a EUR/USD recovery would struggle to extend much longer after the meeting due to the short-term EUR-USD swap spreads still pointing to a lower exchange rate.

EUR: Still eyeing 1.10 The euro stands a chance to end the year above 1.10, which seemed quite unlikely only a few weeks ago when the dollar was restrengthening and ECB rate cut bets were rising rapidly. Despite the diverging narratives which emerged from the ECB and Fed meetings last week, probably favouring more attempts at the 1.1000 key resistance into Christmas, a break higher is far from guaranteed. Firstly, the euro still has to deal with the domestic factors that triggered its previous underperformance. Today, the IFO figures will be watched quite carefully, while the rest of the week sees the final release of CPI figures. We’ll also need to see whether post-meeting comments by ECB officials diverge in some way from last week’s pushback by President Lagarde.

JPY: Ueda disappoints markets, but April hike on the table The Bank of Japan kept rates unchanged today as widely expected, but disappointed market hawkish expectations. The Bank kept its dovish guidance unchanged (“take additional monetary easing steps without hesitation if needed") which forced markets to abandon speculation of a rate hike in January.   The yen took a hit, falling almost by 1.0% against the dollar after the announcement and press conference by Governor Ueda, but we identified a few changes in the Bank’s assessment of the economic outlook that likely endorse the market’s lingering expectations for a hike in April. In particular, the BoJ noted that private consumption has continued to increase modestly, that inflation is likely to be above 2% throughout the 2024 fiscal year and that underlying inflation is likely to increase. Those statements are aimed at paving the way for policy normalisation in 2024, in our view. We expect the yield curve control to be scrapped in January and a hike to be delivered in April. From an FX perspective, the yen may simply revert to trading primarily on external factors (US rates in particular) after the BoJ ignored market pressure and likely signalled the path to normalisation should be a gradual one. We remain bearish on USD/JPY in 2024, as the oversold yen can still benefit from the end of negative rates in Japan and we see the Fed cutting rates by 150bp, but the pace of depreciation in the pair will be gradual in the near term, and we only see a decisive break below 140 in 2Q24.   ⚠️ Did the #BOJ fall asleep on the $JPY 🖨️ print button or what? 🤭Almost makes you wonder if someone out there is in desperate need of liquidity… 🤔 https://t.co/EdRfXb9vUH pic.twitter.com/z2dN3YVtuH — JustDario 🏊‍♂️ (@DarioCpx) December 19, 2023

CHF: SNB FX policy to hit the franc One of the strongest G10 FX performers over the festive period has been the Swiss franc. This has been a surprise to us and many in the market. At the last Swiss National Bank policy meeting (14 December), the SNB told us that it was no longer focusing on FX sales as part of its monetary policy toolkit. That may have been a recent change of mind for the central bank, however, given that in 3Q23, it had still sold CHF37bn of FX (data released 29 December).  With the SNB now predicting inflation to be within range over the forecast horizon and having adopted a balanced risk assessment on inflation too, we doubt the SNB will be too happy with the 3% appreciation in the trade-weighted Swiss franc since its December meeting. We suspect the Bank is more likely to be an FX buyer than seller now and could easily see the SNB helping to nudge EUR/CHF back to the 0.95 area this month.

US GDP rises 3.3% (annualized) in Q4 A fairytale outcome for the US economy GBPUSD drifts lower US economic data continues to point to an economy that’s doing very well despite the various headwinds including very high interest rates. GDP data for the fourth quarter easily exceeded expectations, rising 3.3% on an annualized basis, adding to the increasing view that the US could be heading for a fairytale scenario, not just a soft landing. We’ve spoken a lot about resilence in the US economy over the last couple of years but that the economy can continue to show such strength and low unemployment with interest rates so high and inflation falling back toward target is unbelievable.   Cable edges lower after failing again at 1.28 The pound has repeatedly tested 1.28 against the dollar over the last couple of months and despite the occasional breach, it’s failed to significantly break higher.   GBPUSD Daily Source – OANDA It broke below a rising trendline last week, further signaling that the trend is weakening, amid divergence between price and the MACD. It’s now tested those highs again – and the trend line – and failed which could be another suggestion that the rally is running on fumes. A move below 1.26, the low of the last month, would further back this up and could trigger a sharper decline in the pair.