exchange rates

Summary:  Concentrated equity portfolios are common for many retail investors leading to very high risk. We show that by blending a 5-stock portfolio 50/50 with an ETF that tracks the broader equity market the risk is brought down considerably without sacrificing the long-term expected return. If an investor is willing to lower return expectations a bit then the ETF tracking the equity market can be switched to track an asset allocation and reduce risk even more. Finally, we highlight the risk to real wealth from inflation and what can potentially offset some of that risk. Risk is...? What should you know about it? Last year I wrote about my personal approach to managing my own capital which we got a lot of positive feedback from. Given equities would peak a few months later the note was quite timely. With equities significantly lower from their recent peak and the recent bounce in equities, we are taking a slightly different angle to risk management. We are laying out what risk is and what the typical retail equity investor can do to avoid having too much risk should equities begin falling again. First we need to distinguish between risk and uncertainty. Risk can formally be described as process that is quantifiable with a certain confidence bound related to the sampling size; in other words, a process in which can have statistics. Uncertainty is defined as unquantifiable such as the invasion of Ukraine, because the event is unique and thus has no meaningful prior. If we look broader at risk it all starts with the ultimate definition of risk which is avoidance of ruin. While being an important concept and something that can be avoided if an investor refrain from using leverage, ruin can also be losing 98% of wealth; it is just not complete ruin. But it is ruin enough that you need a 4900% gain to get back illuminating the asymmetry between gains and losses. The most normal definition of risk is the variance of some underlying process (for instance a stock) which is a statistically measure of how much a process varies around its mean value. The higher the variance the higher probability of big moves in either direction. Since most retail investors are equity investors, and thus long-only investors, we should care more about the downside risk than the upside risk (gains) as I want as much variance if its lower bound is above zero return. Focusing on downside risk/returns leads to a concept called semi-variance which only focuses on the returns below a certain threshold, often zero, and describes the downside risk. The problem with this approach is that the underlying assumption is a well-behaved distribution of negative returns. Now, we know financial markets and equities are fat-tailed meaning that we observe many more big moves (both gains and losses) than what the normal distribution would indicated. This means that the semi-variance will underestimate the true risk because of the asymmetry in returns. These observations have lead to concepts such as conditional value-at-risk which is a fancy word for calculating the average return of the say 1% or 5% worst returns. This measure has many wonderful statistical properties with one of them being that it is less sensitive to the assumptions of the underlying distribution of returns. A somewhat related concept which is easier to understand is maximum drawdown which is defined as the decline in portfolio value from the maximum value to the lowest value over the entire investment period. Because of the asymmetry of gains and losses, traders focus a lot on this measure and cut losses to avoid big drawdowns or large single period losses (daily, weekly, monthly). How to reduce risk? 5-stock rule The typical return investor has limited capital and thus often end up with portfolios holding only 3-5 stocks as minimum commission otherwise would equates to high transaction costs. The first plot shows the returns of a 5-stock portfolio in European equities in which we select randomly five stocks in January 2010 and let them run through time. If one stock is delisted or bought we just place the weight in cash. We do this 1,000 times to the intrinsic variance in outcomes of such portfolios. A considerable percentage of these 1,000 portfolio end up with a negative return over this 12,5 year period which in itself is remarkable, but the number of portfolios that end with extremely high total returns is also surprisingly high. In other words, a 5-stock portfolio is a lottery ticket with an extreme variance in outcome. The blue line and area represent the median total return path and its variance if these random 5-stock portfolios are blended 50/50 with a the STOXX 600 Index. The striking result is that the median expected return is not changed but total risk (both gains and losses) is reduced considerably. The sharpe ratio, which measures the annualised return relative to the annualised volatility, improves 20% on average by adding an equity market component. So most retail investors can drastically improve their risk-adjusted returns by adding an ETF that tracks the overall equity market without sacrificing the expected return. Source: Bloomberg and Saxo Group If move on to the maximum drawdown concept we see on the first plot how much the maximum drawdown is reduced by adding the equity market to the 5-stock portfolio. All retail equity investors that have a small concentrated equity portfolio should seriously move to a portfolio where the 5 stocks are kept but reduced to 50% of the portfolio with the freed up cash invested in an ETF that tracks the overall equity market. If an investor is willing to lower expectations for long-term returns, then the ETF tracking the equity market can be substituted with an ETF holding a balanced basket of many different asset classes including government bonds, credit and different types of equities. We use the Xtrackers Portfolio UCITS ETF as an example and should not be viewed as a recommendation but one example of a diversified asset allocation. As the second plot shows the expected distribution of maximum drawdowns from combining 5 stocks with an ETF tracking multiple asset classes is better compared to the other solution combining only with the equity market. The risk-adjusted return is now 43% better than the simple 5-stock portfolio. Source: Bloomberg and Saxo Group Source: Bloomberg and Saxo Group Given equities have bounced back in July and so far also in August retail investors have an unique opportunity to bolster portfolios in the case we get another setback in equity markets. Our view is still that inflation will continue to surprise to the upside and that financial conditions will continue to tighten further adding headwinds for equities. At the same time deglobalisation is accelerating adding unpredictable sources of risk to the overall system. Inflation always says its' word These classical approaches to reduce equity risk mentioned above hold for normal environments but if we get into trouble with a prolonged inflationary period such as in the 1970s or a deflation of equity valuation among technology and health care stocks then we could get prolonged period of negative real rate returns. We have two periods in US equity market history since 1969 in which it took 13 and 14 years to get back to a new high in real terms. Our overall theme in our latest Quarterly Outlook was about the tangible world and our bet is that tangible assets will continue to be repriced higher against intangible assets and if we are right investors should consider commodities to offset the risk to real wealth from inflation. Source: Bloomberg Source: https://www.home.saxo/content/articles/equities/the-retail-equity-investors-guide-to-risk-management-09082022

EUR: Can China come to the euro's rescue? EUR/USD has quietly slipped below support at 1.0700/1.0720 and may be gently making its way to the March lows at 1.0515/0530. As we mentioned last week, we think   EUR/USD is relatively cheap given the massive reversal in energy prices over the last year and that, in time, the 1.05/1.07 area will come to be seen as a summer base.   Helping that proposition would be some kind of recovery in China. The release of the China Beige Book has shown some recovery in the China manufacturing sector in May.   Official May Chinese PMI figures are released later this week. A bounceback here, helping to reverse the recent run-up in USD/CNH, could provide the euro with some support.   For today, the eurozone focus will be on the release of industrial and consumer confidence figures for May. Consensus expects some further deterioration here and if so this should keep EUR/USD on the soft side. We will also hear from a raft of ECB speakers today.   Expect more hawkish rhetoric especially in advance of the May eurozone CPI data on Thursday. Consensus expects core eurozone CPI to edge lower to 5.5% year-on-year in May. Another upside surprise here – feeding the sticky inflation narrative – warns that investors could return to pricing a 4.00% ECB deposit rate.   - Chris Turner

A good start to the year, challenging base in Q2 After a strong first quarter, we raise our price target by PLN 3 per share to PLN 38, but we reiterate a Hold rating. The excellent results of Fabrity, which reported over 30% growth in operating revenues and a similarly strong increase in operating profit, improve our perception of the company compared to other representatives of the software house segment listed on the Warsaw Stock Exchange, where the organic growth rate is slowing down and pressure on margins is visible.     We approach the second quarter with a bit more caution, taking into account last year's demanding base for Fabrity (Q2 was the most profitable quarter for the company in 2022) and less favorable exchange rates, with the strengthening of the PLN, which naturally affects the profitability of revenues from foreign markets in the short term.     We believe that it will be harder to improve the result in Q2, but we hope for a return to higher dynamics in the second half of the year. Fabrity's customers are in many cases less dependent on economic fluctuations. Apart from Frontex, many contracts are projects with a horizon of several years, which should offset the impact of the slowdown in the sector on the company's results. At the same time, it has become easier to recruit employees. Fabrity increased the team by nearly 30 people in the first quarter, compared to 220 at the end of 2022.   Dividend The proposed PLN 4.0 per-share payment is slightly higher than the PLN 3.2 mentioned by the Management Board at the previous conference as the lower limit of the range resulting from the dividend policy. The amount is close to the net cash the company had at the end of Q1'23 and together with the PLN 8.4 per share paid in the previous year, it probably ends the period of above-average distribution, at least until (if) the marketing business is sold.   PerfectBot will use the potential of GPT models Currently, the company is rebuilding the product to use the full potential of GPT models, and in the second quarter it plans to increase the number of US customers testing PerfectBot GPT (a dozen or so entities). Commencement of commercialization is planned for 3Q23.   Results forecast We present restated annual results for the years 2021-22 and in the forecast period with the marketing segment in discontinued operations, which means that practically only the Fabrity business affects revenues and operating results. We assume that it will be more difficult to attract new customers this year due to the weakness of the entire market and, consequently, we expect revenue growth to slow down from +26% y/y in 2023 to +16% in 2024, with a similar operating margin.   Dividend payment in Q4 will reduce financial income in subsequent quarters, which will result in a lower than EBIT increase in net profit in 2023. Below EBIT, we assume a positive contribution from the marketing segment of PLN 1.9m in 2023 and PLN 1.8m in 2024, minority interest profits in Fabrity (PLN 1.1 million and PLN 1.3 million, respectively) and a loss of approximately PLN 0.5 million annually attributed to the 50% stake in PerfectBot   Valuation Our target price is based on DCF (PLN 36.3) and total-of-the-parts (PLN 39.2) valuations. In the sum-of-the-parts valuation, we rely on the Polish peer group for Fabrity, the valuation from the last financing round less a 10% discount for PerfectBot, and target EV/EBITDA and EV/EBIT ratios for marketing.           Valuation Valuation Approach After moving the results of marketing to discontinued operations in our forecasts, we change the weights of individual valuation methods in the calculation of the target price. We no longer take into account the comparative valuation, where 50% weighting were foreign companies from the marketing sector.   Our target price is now based on the DCF valuation (PLN 36.3) and the total-of-the-parts valuation (PLN 39.2, including the Polish peer group for Fabrity, the valuation from the last financing round less a 10% discount for PerfectBot and EV/EBITDA and EV/EBIT ratios for marketing). In the sum-of-the-parts method, the Fabrity valuation range is set by comparison to a wider IT group (lower end) and only to two representatives of the software house sector (upper end).   DCF valuation DCF valuation assumptions: 1) Risk-free rate at 6.0% in the detailed forecast period (previously 6.5%), and 5.0% on TV (unchanged); 2) 7.5% market premium (according to our methodology for entities below sWIG80); 3) Beta unleveraged 1.0x, residual growth rate 3.0% (previously 2.5%, we are increasing after excluding the marketing segment)         Risk factors • Risk related to increased competition in the software house segment • General economic situation • Risk of losing customers • Risk of losing key employees • The risk of failure of the PerfectBot project • Risk related to customers' failure to meet payment deadlines • Currency risk (most of Fabrity revenues is denominated in foreign currencies)   The abovementioned risk factors were covered in detail in the initiation report.        

Financial results of KGL in the first quarter were better than our expectations, but above all they indicated a noticeable improvement compared to the poor last year. Particularly noteworthy is the return of the margin in the key production segment to a level slightly exceeding 20%.   If we combine this with a similarly satisfactory distribution margin of 12.6%, the company managed to achieve the highest gross profit on sales in history. There are many indications that a successful Q1 heralds a good year, although we remain cautious about the company's long-term prospects and the possibility of maintaining margins in the longer term.   Nevertheless, after a successful start to the year, we are raising our earnings forecasts for the full year. The company's results are supported both by the market situation in the form of a decrease in the prices of raw materials and energy, but also by the positive results of the optimization carried out. We are therefore increasing our valuation per KGL share from PLN 14.2 to PLN 16.6. At the same time, at the current price of PLN 14.5 per share, we maintain our accumulate rating.     Our valuation and recommendation assume stabilization of margins in the coming years at lower levels than at present. The strategic position of the company remains difficult due to the fact that its key suppliers and customers remain much larger than it, which means their strong negotiating position.   At the same time, the recently observed favorable environment due to the decline in the prices of petroleum products will not last forever. On the other hand, the company improved the management of selected risks that hit it last year and moved margins in the manufacturing segment to record lows.     In the medium term, KGL also benefits from the SUP directive adopted by the Polish parliament, which forces the replacement of polystyrene packaging used in gastronomy with products manufactured by the company. In distribution, a higher share of technical plastics in sales improves margins, albeit at a noticeably lower value of the segment's revenues.   In the longer term, however, the risk related to the possibility of introducing restrictions on selected categories of plastic products remains high. The Management Board of KGL undertook actions which led to the reduction of the company's debt. The concluded sale and leaseback transaction will result in a one-off profit on the transaction in the amount of approx. PLN 5 million, which will be booked in the second quarter. Therefore, it seems that the first half of this year will be very successful for the company.   Only later will it be possible to verify whether the optimization measures introduced by the company will actually achieve lasting success. Especially if in the meantime they were put to the test by changing the market environment to a less favorable one.   Risk factors: The most important risk factors that may affect the operations of KGL company include:     ❑ Regulatory risks. The EU tries to influence the limitation of the use of plastic and increase the share of its recycling through restrictions and taxes. The impact of these regulations on the company is difficult to determine at the moment without knowing the details of the regulations being implemented. The fact that plastic is negatively perceived by lawmakers is certainly a threat to the industry.     ❑ Risk of exchange rates and commodity prices. A significant part of goods and materials is purchased in foreign currencies (mainly EUR). Due to higher liabilities in EUR than receivables in EUR, the unrealized negative exchange rate differences with a 1% increase in EUR / PLN would amount to approx. PLN 0.5 million (sensitivity at the end of 2022). The prices of raw materials depend to a large extent on oil prices. As a result of the increase in oil prices, the company's revenues and costs are rising, but at the same time the margin decreases and the net effect is negative.     ❑ The risk of rising remuneration costs and shortage of employees. The share of employee costs in total costs in 2022 remained above 19%, despite a significant increase in the share of energy prices in the total cost. As a result of employee shortages and wage pressure, the increase in the cost of salaries reached as much as 27% in 2021. As a result of optimization, the company managed to reduce the growth dynamics in 2022, but it remained at a two-digit level of 10%. Due to demographic trends and high inflation, tensions in the labor market will continue.     ❑ The risk of a conflict of interest. In the company, four long-term managers and founders hold a total of 85.1% of votes at the company's AGM. Additionally, four members of the supervisory board have family ties to them. In such a situation, there is a risk of a conflict of interest at the expense of minority shareholders (mitigated by two independent members of the supervisory board).     ❑ Risk of over-indebtedness. After 4 years of intensive investments, the company significantly increased its interest debt, which reached the level of 5.1x EBITDA at the end of 2022. This ratio fell in Q1 to 3.8x EBITDA, but it should still be considered elevated. However, the company took steps to reduce it by concluding a sale and leaseback transaction.   The risks that we consider to be high include regulatory issues (political decisions are quite unpredictable and have a large impact on the company), indebtedness and the risk of commodity prices.  

Russia’s weekend mutiny cast doubts on Putin’s grip on power. No major impact on markets but keep a lookout on Gold, which bounced off the key support zone of US$1,913/1,896 per ounce. Stern FX verbal intervention from Japan’s top currency official. Watch USD/JPY key near-term support at 142.50/25. US banking stocks tumbled ahead of annual key Fed’s banks’ stress test results Before the start of this new trading week, market participants were being jolted from their weekend leisure activities to shift their focus to the internal coup in Russia that may put President Putin’s power grip in jeopardy. Yevgeny Prigozhin, leader of the Wagner Group, a Russian key independent military contractor that has played a significant role in the ongoing Russia-Ukraine territorial conflict voiced displeasure with Russia’s top leadership in handling the Russia-Ukraine situation, took over two Russian cities and order his mercenaries to march towards Moscow on Saturday.   Russia’s weekend mutiny started fast and ended fast Upon reaching 200 km within Moscow, Prigozhin’s troops halted and made a U-turn back to their field camps. In addition, Putin dropped earlier treason charges on the Wagner Group and allowed Prigozhin to head to Belarus, Russia’s western neighbour for exile. In less than 48 hours, the mutiny in Russia is over without any clear details on what has transpired that led to Prigozhin’s retreat as Putin has not made any official speech or press conference yet. US Secretary of State Blinken commented that the weekend’s uprising by Prigozhin, a former Putin royalist has posed a direct challenge to Putin’s grip on power in Russia and provided a battlefield advantage to Ukraine. On the other hand, several geopolitical commenters have analyzed the situation to be in favour of Putin in which Wagner Group’s mutiny may be used as a cover for Putin to remove the top brass in Russia’s Ministry of Defence; Shoigu, the defence minister and Gerasimov, chief of the general staff as they posed a threat to Putin’s rule. Thus, the change of Russia’s military leadership may be part of the “deal” package that the Kremlin and Prigozhin agreed on.   No significant movements in markets but watch gold In today’s Asian session, both the S&P 500 and Nasdaq 100 e-mini futures were up slightly by around +0.20% after posting their worst weekly losses last week in three months. Major Asian stock indices were mixed at this time of the writing, Nikkei 225 (-0.24%), Kospi 200 (+0.60%), Hang Seng Index (-0.14%), Hang Seng China Enterprises Index (+0.13%), and CSI 300 (-0.70%). The US dollar is almost unchanged on average with the US Dollar Index inching down by a meagre -0.1%. Gold, a traditional safe haven asset that tends to benefit in light of major geopolitical risks upheaval in the past has exhibited some interesting price actions movement from a technical analysis perspective.     Gold’s decline has managed to bounce off from a key support zone of US$1,913/1,896 per ounce   Fig 1: Gold (XAU/USD) medium-term trend as of 26 Jun 2023 (Source: TradingView, click to enlarge chart) Last week’s decline seen in Gold (XAU/USD) has led its price actions to hit a crucial medium-term pivotal support zone of US$1,913/US$ 1,896 per ounce (printed an intraday low of US$1,910 last Friday, 23 June) which is being defined by a confluence of elements; the lower boundary of the medium-term ascending channel in place since 3 November 2022 low, 38.2% Fibonacci retracement of the prior medium-term up move from 3 November 2022 low to 4 May 2023 high, and approximately the downside price objective of recent “Descending Triangle” bearish breakdown. Momentum has also improved as the daily RSI oscillator has managed to stage a bounce off the key corresponding support at the 36 level. Watch the US$1,896 key medium-term pivotal support and a clearance above US1,940 intermediate resistance sees the next resistance coming in at US$1,990 (also the 50-day moving average).   FX verbal intervention from Japan After a strong upside movement seen in the USD/JPY that recorded a weekly gain of +1.3% last week which outperformed other major USD crosses, the US Dollar Index only rose by +0.56% over the same period, Japan’s Vice Finance Minister Masato Kanda, a top currency official that has oversight over foreign exchange market matters has sounded the alarm in today’s morning Asian session. Based on a Reuters report, Kanda said that the authorities will respond to any excessive moves in the foreign exchange market, warned that the recent yen moves were rapid and will not rule out any chance of an FX intervention. He said, “Regardless of the direction, it’s generally not good for the economy if exchange rates move excessively in a way that deviates from economic fundamentals.” Today’s verbal intervention was the most pronounced made by any of Japan’s finance ministry officials in the past month when USD/JPY sailed past the prior 141.00 and 142.00 psychological levels “effortlessly”. USD/JPY has shed -0.2% intraday and broke key near-term support at 143.45 at this time of the writing, the next support to watch will be at 142.50/25 (former swing highs of 11/21/22 November 2022).     Fed’s annual banks stress test results out on Wednesday The US Federal Reserve will unveil the results of its annual stress tests on the 23 biggest US banks on Wednesday, 28 June. The key focus will be on a section of the test, labelled as “exploratory market shock”, this is the first time such a test is being conducted on the trading books of the largest US banks. The urgency and significance of the “exploratory market shock” stress test come after the US regional banks’ turmoil. Hence, monitoring of fixed income duration risk is paramount now given that the latest Fed’s hawkish monetary policy guidance is to keep interest rates higher for a longer period. Last week, the US banking stocks shed by -6.80% as indicated by the SPDR S&P Bank exchange-traded fund, its worse weekly performance in seven weeks and underperformed the S&P 500.     Fig 2: S&P 500 major trend with VIX as of 26 Jun 2023 (Source: TradingView, click to enlarge chart) If the “exploratory market shock” stress test results come in unfavourable, it may put more downside pressure on US banking stocks which in turn may trigger a volatility upside breakout in the VIX, a measurement of implied volatility on the S&P 500 as it has compressed to a low level of 13.44 not seen since early February 2020 before the pandemic. A sudden spike in VIX may dampen the current bullish mood for US stock indices.  

USD/TWD: Tracking the CNY weaker   The TWD has tracked the CNY weaker over the last month, and even slightly underperformed it over that period, losing more than 2% from a month ago. As we are expecting further CNY weakness in the coming month, we’d look for the TWD to track weaker too to maintain relative exchange rates. One positive development is that there are tentative signs that the semiconductor cycle may be troughing. It is early days yet, but that might provide some more support for the TWD in the coming months as that develops.    

While we find this a useful framework to assess the extent of de-dollarisation, we prefer to examine the challenge to the dollar’s dominance through the three key areas: of i) trade and commerce, ii) the asset side (store of wealth) and iii) the liability side (currency of issuance). Looking at the evidence so far (Figure 2), it appears that despite some loss of popularity since 2015 (we use this year as a frame of reference due to its similarities with current exchange rates), de-dollarisation has not been very active in the last couple of years. Over the same time, the dollar’s role in the debt securities market has even increased.     Overall, the USD presence in various segments has become more even, and its relative dominance versus other currencies has remained, which is especially noticeable in the unchanged share of the USD leg of currency pairs traded on the global OTC market. At this point, it doesn’t seem that the dollar is any immediate danger of losing its status as the primary global currency.   At the same time, however, there are challenges. In this report we will take a closer look at the changing role of US dollar in trade, assets, liabilities, and the FX market turnover, paying close attention to the role of China and Russia.

  Yesterday, the EUR/USD currency pair rose to its moving average line but almost immediately rebounded and began a stronger decline. This decline eloquently demonstrated who currently dominates the market. Traders shouldn't be misled by the movement toward and potentially beyond the moving average – this line is close to the price (due to low volatility) and can touch it almost daily. However, as we can see, the first attempt to rise above the moving average failed. Importantly, this cannot be blamed on strong macroeconomic data for the dollar or the fundamental backdrop. Technically, nothing has changed. The pair updated its local minimum yesterday, meaning the downward trend remains.   Thus, expecting the European currency to fall is the most logical under the current circumstances. As we have repeatedly stated, there have been no reasons for the euro to grow for a long time. The ECB increasingly signals a potential pause in tightening, and some experts do not anticipate more than one rate hike in 2023. This means the ECB rate will remain much lower than the Federal Reserve. Demand for the dollar will increase since, at present, one can earn much more from bank deposits and treasury bonds in the US than from similar instruments in the European Union. Additionally, inflation in the EU is higher, while it has already dropped to 3.2% in the US. Besides, it should be noted that the Federal Reserve can also raise its rate again.   It has far better opportunities for tightening than the European Union. However, we mentioned several months ago that the ECB is constrained in its monetary moves as it needs to consider the interests of all 27 member countries, some of which are economically weak and cannot withstand overly strict monetary policies. Lagarde is unlikely to protect the euro from falling. At this time, the macroeconomic background is irrelevant. It might lift the euro, but we advocate continuing the pair's decline. On Friday, speeches from Christine Lagarde and Jerome Powell are scheduled. If we are mistaken in our assessment of rate changes in the US and EU, the chairpersons of both central banks can convey the true information to the market. However, the symposium in Jackson Hole is not where Lagarde and Powell will be candid and make sensational announcements. However, a few hints might suffice for the market. The Fed's position is now even less critical than the ECB. If the Fed's rate doesn't increase in September, it will in November. On the other hand, if the ECB pauses in September, it will find itself in a much less favorable position since its rate is significantly lower than the Fed. Hence, ultra-hawkish rhetoric is required from Lagarde for the European currency to start growing again. On the 24-hour TF (Time Frame), the price has settled below the Ichimoku cloud, but this isn't the case. We are looking at the Senkou Span B line at the 1.0862 level, and there needs to be a clear and confident consolidation below this level. Nonetheless, we also didn't witness a strong upward recoil after this level was tested, meaning the quote decline might continue at a moderate pace.     The average volatility of the EUR/USD currency pair over the last five trading days as of August 23 is 64 points and is characterized as "average." Consequently, we expect the pair to move between the levels of 1.0794 and 1.0922 on Wednesday. A reversal of the Heiken Ashi indicator upwards will indicate a new upward correction phase. Near Support Levels: S1 – 1.0803 S2 – 1.0742 S3 – 1.0681   Near Resistance Levels: R1 – 1.0864 R2 – 1.0925 R3 – 1.0986   Trading Recommendations: The EUR/USD pair currently maintains a downward trend. For now, staying in short positions with targets at 1.0803 and 1.0794 is advisable until the Heiken Ashi indicator turns upwards. Long positions can be considered if the price consolidates above the moving average, with targets at 1.0986 and 1.1047.   Illustration Explanations: Linear regression channels help determine the current trend. The current trend is strong if both are pointing in the same direction. Moving average line (settings 20.0, smoothed) determines the short-term trend and the direction in which trading should proceed. Murray levels are target levels for movements and corrections. Volatility levels (red lines) are the probable price channel in which the pair will operate over the next day, based on current volatility indicators. CCI Indicator – Its entry into the oversold area (below -250) or the overbought area (above +250) indicates an impending trend reversal in the opposite direction.  

FX Daily: Peso too strong, renminbi too weak, dollar just right FX markets await today's release of the August US jobs report to see if we've reached any tipping point in the labour market. Probably not. And it is still a little too early to expect the dollar to embark on a sustained downtrend. Elsewhere, policymakers in emerging markets are addressing currencies that are too weak (China) and too strong (Mexico).   USD: The market seems to be bracing for soft nonfarm payrolls data Today's focus will be the August nonfarm payrolls jobs release. The consensus expects around a +170k increase on headline jobs gains, although the "whisper" numbers are seemingly nearer the +150k mark. Importantly, very few expect much change in the 3.5% unemployment rate. This remains on its cycle lows, continues to support strong US consumption, and keeps the Fed on its hawkish guard. We will also see the release of average hourly earnings for August, which are expected to moderate to 0.3% month-on-month from 0.4%. As ING's US economist James Knightley notes in recent releases on the US economy and yesterday's US data, there are reasons to believe that strong US consumption cannot roll over into the fourth quarter and that a recession is more likely delayed than avoided. But this looks like a story for the fourth quarter. Unless we see some kind of sharp spike higher in unemployment today, we would expect investors to remain comfortable holding their 5.3% yielding dollars into the long US weekend. That is not to say the dollar needs to rally much, just that the incentives to sell are not here at present. If the dollar is at some kind of comfortable level, policy tweaks in the emerging market space over the last 24 hours show Beijing trying to fight renminbi weakness and Mexico City trying to fight peso strength (more on that below). We suspect these will be long, drawn-out battles with the market. DXY can probably stay bid towards the top of a 103-104 range.

Metals – Fresh stimulus from China for the property sector Base metals prices extended this week’s gains this morning as healthy economic data and fresh stimulus measures in China buoyed sentiment. Caixin manufacturing PMI in China increased to 51 in August compared to 49.2 in July; the market was expecting the PMI to remain around 49. This is the strongest manufacturing PMI number since February. Meanwhile, Beijing has announced fresh stimulus measures aimed at supporting the property sector. The People’s Bank of China has lowered the minimum downpayment for mortgages for both first-time buyers (from 30% to 20%) and second-time buyers (from 40% to 30%) while the minimum interest premium charged over the Loan Prime Rate has also been reduced. China is also allowing customers and banks to renegotiate interest rates on existing housing loans which could reduce interest expenses for borrowers. LME continues to witness an inflow of copper into exchange warehouses. LME copper stocks increased by another 3,675 tonnes yesterday, taking the total inventory to a year-to-date high of 102.9kt. Meanwhile, cancelled warrants for copper remain near zero levels, hinting that there may not be any inventory withdrawals from LME in the short term and total stocks could continue to climb over the coming weeks. Europe witnessed an inflow of 2,700 tonnes yesterday whilst 950 tonnes were added in the Americas and 25 tonnes in Asia. Gold prices have held steady at around US$1,940/oz as the latest economic data from the US eased some pressure on the Federal Reserve to continue with rate hikes. The core PCE (Personal Consumption Expenditure) deflator in the US increased at a flat 0.2% month-on-month in July, the second consecutive month at 0.2% which should help the Fed in getting inflation back on track to around 2%. On the other hand, data from Europe was not that supportive with core CPI falling gradually from 5.5% to 5.3% and CPI estimates remaining flat at 5.3%. The focus is now turning to today’s US non-farm jobs report which is expected to show a smaller rise in payrolls in August.

GBP: Look out for BoE Governor Andrew Bailey at 3:15 pm CET Sterling is coming under pressure against the strong dollar and marginally outperforming the pressured euro. High wage growth looks to be the primary reason for the market retaining expectations of a further 57bp of Bank of England (BoE) tightening in this cycle – making pivotal next Wednesday's release of the average earnings figures for July. Our base case is one more 25bp hike from the Bank on 21 September and then a prolonged pause. The manufacturing slump in the eurozone and these high energy prices suggest EUR/GBP can trade at the lower end of that 0.8500-0.8600 range into that BoE rate meeting on 21 September. GBP/USD looks more vulnerable to a firm test of 1.2500 psychological support.  

While the euro is actively trying to find some kind of bottom against the US dollar, the speeches of European politicians are coming to an end. Perhaps after that, the pressure on the single currency will somehow decrease, but personally, I have strong doubts about this, as there are absolutely no reasons for it. And if we also consider the first possible pause in the cycle of interest rate hikes from 2022, as well as the actively shrinking European economy, then we can deduce that there will be fewer reasons to buy risky assets.   However, some hawkish European politicians continue to "stick to their guns." According to a member of the Executive Board, Klaas Knot, investors betting against the European Central Bank raising interest rates next week may underestimate the likelihood of it happening. While a slowdown in the eurozone's 20-nation economy is sure to damp demand, updated inflation projections won't differ much from the last round in June, the Dutch central bank chief said. "I continue to think that hitting our inflation target of 2% at the end of 2025 is the bare minimum we have to deliver," said Knot.   As I mentioned earlier, he made such statements before a week-long period of calm preceding the September meeting of the ECB Governing Council. Knot also noted that the markets are currently experiencing difficulties, which are also experienced by the central bank. Just recently, the central bank governors of Germany, Belgium, Austria, and Latvia expressed support for another quarter-point rate hike, likely the last in this cycle. However, their colleagues from Italy and Portugal are among those emphasizing that economic risks are starting to emerge. Recent eurozone PMI data and today's revised downward GDP report for the eurozone in the 2nd quarter clearly indicate this. ECB President Christine Lagarde, speaking earlier this week, also did not make any commitments, simply stating that inflation is too high, and the central bank is determined to tame it, with decisions based on appropriate data. Obviously, it's also challenging to assess the current progress in inflation. Underlying pressure has decreased, but the overall reading has increased due to a sharp spike in non-oil prices. European politicians have also recently discussed this, lamenting issues with the energy market. Wage negotiations and corporate price behavior will be crucial in determining how quickly inflation returns to the target level. As for today's technical picture for EUR/USD, the bears have slightly eased their grip. To maintain control, bulls need to stay above 1.0700. This will allow them to break back to 1.0750. From there, they can climb to 1.0770, but it will be quite difficult to do so without support from major players. In the event of a downtrend, I only expect significant action from major buyers around 1.0700. If there's no significant support there, it would be a good idea to wait for a new low at 1.0665 or open long positions from 1.0635. Regarding the technical picture for GBP/USD, the pound will continue to fall. We can only bet on a recovery once traders take control of the level at 1.2530. Returning to this range will restore hope for a recovery towards 1.2560, after that we can talk about a more significant surge towards 1.2700. In case the pair falls, bears will try to take control below 1.2484. If they succeed in doing so, breaking through the range will hit bullish positions and push GBP/USD towards the low at 1.2440 with the potential to reach 1.2400.

Mercor is exposed to a number of internal and external risks related to running a business, the most important of which are: ■ Economic situation in cubature and high-rise construction. The Company's clients are mainly general contractors. The weaker economic situation in the construction industry may translate into a decrease in demand for the Company's products/services and deterioration of financial results. ■ Prices of production materials. An increase in the prices of production materials in relation to the planned level at the time of submitting the offer may result in an increase in costs and deterioration of the Company's profitability. ■ Availability of significant raw material resources. In its production process, the Company mainly uses steel, aluminum and polycarbonate. Lower availability of raw materials may adversely affect the Company's ability to fulfill the signed contracts and cause an increase in the prices of these raw materials. ■ War in Ukraine. The ongoing armed conflict between Russia and Ukraine has a direct and indirect impact. The indirect impact is a possible change in investors' moods and preferences, increase in prices and problems with the availability of production and energy raw materials, potential disruptions in supply chains. In addition, Mercor holds a 55% share in the share capital of the company in Ukraine (TOB MERCOR UKRAINA sp. z o.o.) and a 55% share in the share capital of the company in Russia (OOO Mercor-PROOF LLC). Loss of control or other unfavorable events may result in a write-off, showing a loss in the financial statements and loss of markets. ■ Change in interest rates. Mercor has debt due to credits, loans and finance leases. An increase in interest rates may result in an increased cost of servicing this debt. ■ Changes in exchange rates. The Group has its branches and production plants abroad and concludes transactions in currencies other than the functional one. The Group uses hedging by concluding forward transactions, but it is not possible to completely eliminate the impact of changes in exchange rates. ■ Inflation rate. Higher prices may adversely affect the Company's profitability. In addition, higher inflation may increase employees' wage expectations. ■ Counterparty credit risk. In the event of a deterioration in the liquidity situation of customers, the Company may experience problems with recovering receivables on time. ■ Availability of workers with appropriate qualifications. The company provides its customers with ready-made solutions in the field of fire protection in buildings, for which it is necessary to have adequately qualified employees. The shortage of employees may adversely affect the ability to implement an appropriate number of projects and decrease revenues. ■ Risk of unfavorable tax decisions. There is a risk that the correctness of the calculated taxes will be questioned by the tax authorities and a risk of issuance of decisions unfavorable to the Company    

Tesla fuels market rally By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank    Tesla jumped 10% yesterday and reversed morose mood due to the Apple-led selloff. Tesla shares flirted with the $275 per share on Monday, thanks to Morgan Stanley analysts who said that its Dojo supercomputer may add as much as $500bn to its market value, as it would mean a faster adoption of robotaxis and network services. As a result, MS raised its price target from $250 to $400 a share.   Tesla rally helped the S&P500 make a return above its 50-DMA, as Nasdaq 100 jumped more than 1%. Apple recorded a second day of steady trading after shedding almost $200bn in market value last week because of Chinese bans on its devices in government offices, and Qualcomm, which was impacted by the waves of the same quake, recovered nearly 4%, after Apple announced an extension to its chip deal with the company for 3 more years. Making chips in house to power Apple devices would take longer than thought.   Speaking of chips and their makers, ARM which prepares to announce its IPO price tomorrow, has been oversubscribed by 10 times already and bankers will stop taking orders by today. The promising demand could also encourage an upward revision to the IPO price, and we could eventually see the kind of market debut that we like!    Today, at 10am local time, Apple will show off its new products to reverse the Chinese-muddied headlines to its favour before the crucial holiday selling season. The Chinese ban of Apple devices in government offices sounds more terrible than it really is, as the real impact on sales will likely remain limited at around 1%.   In the bonds market, the US 2-year yield is steady around the 5% mark before tomorrow's much-expected US inflation data. The major fear is a stronger-than-expected uptick in headline inflation, or lower-than-expected easing in core inflation. The Federal Reserve (Fed) is torn between further tightening or wait-and-see as focus shifts to melting US savings, which fell significantly faster than the rest of the DM, and which could explain the resilience in US spending and growth, but which also warns that the US consumers are now running out of money, and they will have to stop spending. So, are we finally going to have that Wile E Coyote moment? Janet Yellen doesn't think so, she is on the contrary confident that the US will manage a soft landing, that the Fed will break inflation's back without pushing economy into recession. Wishful thinking?   But everyone comes to agree on the fact that the Eurozone is not looking good. The EU Commission itself cut the outlook for the euro-area economy. It now expects GDP to rise only 0.8% this year, and not 1.1% as it forecasted earlier, as Germany will probably contract 0.4% this year. The slowing euro-area economy has already softened the European Central Bank (ECB) doves' hands over the past weeks. Consequently, the EURUSD gained marginally yesterday despite the fresh EU commission outlook cut and should continue gently drifting higher into Thursday's ECB meeting. There is no clarity regarding what the ECB will decide this week. The economy is slowing but inflation will unlikely to continue its journey south, giving the ECB a reason to opt for a 'hawkish' pause, or a 'normal' 25bp hike. 

GBP: Rolling lower As we discussed in yesterday's FX Daily, the market did read the latest wage developments slightly dovishly and re-priced both the Bank of England tightening cycle and sterling lower. It is quite incredible to see the Bank Rate now priced just above 5.50% next February. This terminal rate had been priced close to 6.50% just a few months ago. If we are right with our call for an ECB rate hike tomorrow, EUR/GBP could edge up towards the 0.8670 area. And given that we like a continued strong dollar in the short term, expect GBP/USD to press the 200-day moving average at 1.2430. Recall that based on speculative positioning data, both the euro and sterling look the most vulnerable to further dollar strength.

Exchange rates Production realised in Poland represents approximately 45% of total sales, while the market share of sales in the Polish market is <30%. The ratio of raw material consumption costs to realised revenues is approximately 50% and purchases are mainly made in EUR and USD. However, a significant proportion of foreign currency costs overlap with realised revenues, and high exchange rate volatility makes it difficult to implement an optimal purchasing strategy. Competitive pressures In the past, weak market conditions have led to increased competitive and pricing pressure from some players, resulting in reduced margins in the industry. In addition, more aggressive pricing by competitors may lead to a redistribution of market shares among individual players. Raw material prices The market for raw material suppliers is highly consolidated and the company is therefore a market price taker. The company's multi-sourcing strategy - i.e. sourcing from a number of different sources depending on local market prices - allows it to optimise its purchasing structure to a large extent in terms of the margins it achieves. Situation in the construction market The company's sales are mainly focused on the housing and volume construction markets. High interest rates are leading to a reduction in the volume of new housing purchases and a reduction in the realisation of cubature investments, as investors find it difficult to access finance. In turn, high inflation limits the purchasing power of consumers, who postpone home improvements. Risk of unsuccessful M&A The Group's strategy is based on the acquisition of companies with a similar business profile (foams, adhesives, sealants) in markets where the Group's presence is negligible, as well as market shares in complementary product areas (e.g. glass wool). There is a risk that the acquired businesses will not meet the Board's performance expectations.        

Why the Bank of England might not raise rates on Thursday We're expecting one final rate hike from the Bank of England this week with wage growth and inflation both proving stubborn. But recent comments show the Bank is laying the ground for a pause, and we aren’t ruling that out on Thursday.   Investors have pared back BoE hike expectations Investor expectations for the Bank of England have come a long way since the start of July. Back then markets were pricing four more rate hikes, in addition to the one in August. Now it’s less than two, and investors are toying with the idea of a pause from the Bank of England on Thursday. Investors are pricing a 20% chance of a ‘no change’ decision, and that follows a series of comments from BoE officials that appear to be laying the ground for a pause. The Bank has made it abundantly clear that it thinks keeping rates elevated for a long period of time is now more important than how high they peak. Back in August, the BoE included a new line in its policy statement, saying that rates needed to stay “sufficiently high for sufficiently long”. The Bank is now also formally describing policy as "restrictive". That may be a statement of the obvious with rates above 5%, but it’s nevertheless significant that policymakers are now making a point of saying this.  To hammer home the message, Chief Economist Huw Pill said recently that he'd prefer a 'Table Mountain' profile for rates over a 'Matterhorn', or in other words a steadier path with a long period of no change, over a sharper pace of rate hikes and a swifter descent from the peak.   Markets have lowered expectations for peak Bank Rate   Could we get a pause on Thursday? This is a simple reflection of the UK mortgage market, where roughly 85% of lending is fixed, albeit for a relatively short amount of time. The average rate being paid on outstanding mortgages has risen from 2% to 3% so far, and we expect that to rise above 4% next year even if the BoE doesn’t hike rates any further. That's why the Bank is making it its mission to convince investors that rates need to stay high for a long time, and any further rate hikes should be seen as a tool to meeting this end. It does feel like the Bank is actively trying to set the stage for a pause. Could that happen this week? We wouldn’t totally rule it out. Policymakers will have had a keen eye on the Federal Reserve, which has succeeded in pushing back rate cut expectations with the so-called “skip strategy”. By drawing out its tightening cycle by pausing at every other meeting, the Fed has managed to keep the conversation about how many hikes we have left, rather than how long it will take before we get rate cuts. A similar strategy, whereby the BoE pauses in September but hints strongly that it could hike again in November, could be tempting for policymakers this week.     Our base case is one more rate hike None of that is our base case though, and we’re expecting one final hike on Thursday. The reality is that both wage growth and services inflation, the two key metrics upon which the BoE is basing policy, are higher than forecast back in August. We also still have one round of CPI data due the day before the meeting, and we expect services inflation to nudge slightly higher again.  Still, look closely enough and there are signs that wage growth may be starting to ease. The jobs market is clearly cooling now too, while a range of surveys suggest that fewer firms are raising prices, not least because lower energy prices are taking pressure off service sector costs. We expect this to show more readily in the services CPI numbers over the next few months. That means the Bank can probably afford to end its tightening cycle this week. Assuming though that the fall in services inflation and wage growth is pretty gradual, we think a rate cut is unlikely until at least the second quarter of next year.   Services inflation should start to come down later this year   Expect a faster pace of quantitative tightening (QT) The other decision the Bank will be making this week is on quantitative tightening as it decides whether to ramp up the pace over the next 12 months. The stock of gilts due to mature over the next year is roughly £10bn higher than over the last. The Bank has also completed its unwind of corporate bonds over the past year, and the implication is that it might boost gilt sales over the next 12 months to compensate. We therefore think the Bank will plan to reduce its gilt holdings by roughly £100bn over the next 12 months, up from £80bn over the last.   GBP: Biggest FX reaction comes on a pause On a trade-weighted basis, sterling has had a good year. It is still up over 5% year-to-date, although is now around 2% off the highs seen in July. Driving a large portion of that trend has been expected Bank of England rate policy. Most notably the recent repricing in the BoE terminal rate towards the 5.60% area from a peak near 6.50% has explained a large part of sterling's softness over the last couple of months. As policy tightening cycles in the G10 (ex-Japan) policy space reach their conclusions, one could argue that 8-10bp adjustments in money market curves will contribute only noise not trend to FX markets. And certainly, an as-expected 25bp BoE rate hike Thursday amid some hawkish rhetoric looks unlikely to be a game-changer for sterling.  That said, a surprise pause would have a big impact on sterling. And while the BoE may try to market a pause like a Fed 'skip', the market would doubt that the BoE would be in a position to raise rates later in the year. The FX options market prices a 95bp GBP/USD range for the 24-hour event risk covering the Fed and BoE meetings this week. A BoE pause could well push cable below the May lows just above 1.2300.  Perhaps surprising to some has been sterling underperforming the euro too - despite very poor eurozone confidence figures and the European Central Bank pointing to the end of the tightening cycle. Again this looks largely down to the greater downside for expected UK interest rates - a factor which should weigh on sterling into 2024. Our year-end 2023 EUR/GBP forecast remains 0.8800.    

GBP: Most of the short-term repricing is done It was not our baseline view, but we did warn that EUR/GBP could hit 0.8700 yesterday if the Bank of England paused, and that is what happened. As our UK economist, James Smith, discusses in his BoE review comment, we think the terminal rate has been reached now at 5.25%. However, given that it was such a close vote yesterday (5-4) there is still a chance of one final hike at the 2 November BoE meeting. This means that the market pricing of around a 50% chance of one last hike may largely stay with us until that meeting. Pricing of the BoE curve has been a big driver of sterling this year and we suspect EUR/GBP can now drift in a 0.86-0.87 range into that meeting. A leg higher to 0.88/89 probably requires some news of a serious UK slowdown and the market moving on to pricing the 2024 easing cycle. GBP/USD is another matter, however. If EUR/USD trades down to 1.05, GBP/USD could be trading near 1.21.

FX Daily: King dollar, queen krona The dollar is finding more strength thanks to a soft risk environment and attractive real rates after the bond selloff. We now see downside risks for EUR/USD potentially extending to 1.02 in a bond sell-off acceleration. SEK is emerging as a big outlier, and we suspect Riksbank FX hedging is behind that, watch for action around 10:00 am BST this morning.   USD: Unstoppable strength The dollar is enjoying another widespread rally, shrugging off yesterday’s unconvincing US consumer confidence figures while being boosted by a round of defensive re-positioning amid a deteriorating risk environment. Furthermore, the recent treasury selloff has kept fuelling the real rate attractiveness of the dollar, reinforcing the greenback’s role as the go-to currency in the current market’s environment. Federal Reserve speakers have also thrown some hawkish comments into the mix. Neel Kashkari confirmed his notably hawkish stance saying that one more hike is needed even in a soft-landing scenario, and Michelle Bowman has also pointed in the direction of more tightening. Market pricing has, however, remained stuck in a less hawkish position than the recent dot plot projections – less than a 50% chance of another hike this year and the effective rate being cut to 4.67%. So, there are two lingering upside risks for the dollar stemming purely from the rate market: one being generated from higher longer-dated yields, one from a potential hawkish repricing of short-term rate expectations upholding short-term swap rates. We discuss those risks from a EUR/USD perspective in this article, where we conclude there is more room for a USD rally coming from back-end treasury underperformance rather than another big move in USD short-term swap rates. That’s because the gap between the December 2024 Fed Funds rate market pricing and the 2024 dot plot is much smaller compared to what it was back in June (and throughout the summer). Today, the US calendar includes durable goods orders for the month of August and another speech by the arch-hawk Neel Kashkari. Fed Chair Jerome Powell will participate in a town hall tomorrow, although it is unclear whether he will touch upon monetary policy issues. The next level to watch in DXY is the 106.82 November 2022 highs, although we have seen the index rise comfortably through key levels, and upside risks now extend to the 107.00/107.50 area should the US bond market sell-off accelerate further.

SEK: Riksbank propping krona ? The Swedish krona has been a big outlier since the start of the week, strengthening for two consecutive sessions while all other G10 currencies fell against the dollar. While the positive developments on the SBB saga have likely helped compress the EUR/SEK risk premium, that seems insufficient to justify such outperformance, especially considering the krona’s high beta to risk sentiment, which has been soft. It appears instead that the Riksbank’s start of hedging operations is having a substantial impact on the market. For context, the Riksbank announced last Thursday that it would hedge part (USD 8 billion and EUR 2 billion) of its FX reserves in a risk-management move aimed at reducing losses in the event of a krona appreciation. Unlike other measures of this kind, the Bank did not release a schedule for purchases but only said that the operations would take four to six months, the sales “will be adjusted to market conditions to avoid counteracting the Riksbank's objectives” and weekly sales data will be published with a two-week delay. We saw two sharp drops in USD/SEK and EUR/SEK in the past two sessions shortly after 1000 BST in Monday’s and Tuesday’s session. We’ll be on the lookout today for a similar move around that time today, as that may be a signal that the Riksbank is conducting its daily sales operations around that morning timeslot. The Riksbank stressed this is not FX intervention or a monetary policy tool but mere risk management. The lack of transparency around the amount of weekly sales means the Bank can sell larger amounts at higher USD/SEK and EUR/SEK levels and then justify this as a mere loss-minimisation approach (buying more SEK when it is cheaper). For now, it seems like the wanted or unwanted beneficiary effect on SEK is working. We still point at some upside risks in the near term for USD/SEK and EUR/SEK, especially once markets adjust to the Riksbank being present in the FX market, although now there is definitely value in holding SEK against other high beta pro-cyclical currencies like NOK.

Ailleron Above-average margins, prospects for double-digit earnings growth Valuation and recommendation Despite the dividend cut by PLN 1, we raise our target price from PLN 26 to PLN 28 and reiterate our BUY recommendation. A comparative valuation based on a group of global software houses yields PLN 36.3 per share. A comparison with Spyrosoft based on adjusted net profit for the last four quarters implies a valuation of PLN 36.0, but we note a rather temporary bottom in SPR's profitability and believe a certain premium, albeit not a large one, is justified. Q3'23 Forecasts We expect revenues of PLN 16m in FinTech and PLN 99m in Software Mind, where Q2 saw slightly higher revenues in the telecom sector, but we do not expect this effect in the current period, and furthermore, exchange rates have been the most unfavourable for the company's revenues in many quarters (average USD/PLN down 12% y/y and average EUR/PLN down 5% y/y). We forecast an operating profit of PLN 15m, the best quarter so far this year and comparable to the excellent Q3'22. Part of the FX exposure is still hedged. We expect a slight decline in net profit due to the absence of Pekao contract revenues, with some drag from team costs. This effect is expected to fade by the last quarter of 2023, with virtually no impact on the P&L from next year onwards. Traditionally, we expect the strongest results in the Ailleron group in Q4.    

FX Daily: Bond bears give new energy to the dollar A very soft 30-year Treasury auction and hawkish comments by Powell triggered a rebound in US yields and the dollar yesterday. Dynamics in the rates market will remain key while awaiting market-moving US data. In the UK, growth numbers in line with expectations, while in Norway, inflation surprised to the upside. USD: Auction and Powell trigger dollar rebound The dollar chased the spike in US yields yesterday following a big tailing in the 30-year Treasury auction and hawkish comments by Fed Chair Jerome Powell. Speaking at the IMF conference, Powell warned against reading too much into the softer inflation figures and cautioned that the inflation battle remains long, with another hike still possible. If we look at the Fed Funds future curve, it is clear that markets remain highly doubtful another hike will be delivered at all, but Powell’s remarks probably represent the culmination of a pushback against the recent dovish repricing. Remember that in last week’s FOMC announcement, the admission that financial conditions had tightened came with the caveat that the impact on the economy and inflation would have depended on how long rates would have been kept elevated. The hawkish rhetoric pushed by Powell suggests that the Fed still prefers higher Treasury yields doing the tightening rather than hiking again, and that is exactly what markets are interpreting. The soft auction for long-dated Treasuries also signals the post-NFP correction in rates may well have been overdone and could set a new floor for yields unless data point to a worsening US outlook. Today’s highlights in the US calendar are the University of Michigan surveys. Particular focus will be on the 1-year inflation gauge, which is expected to fall from 4.2% to 4.0%. On the Fed side, we’ll hear from Lorie Logan, Raphael Bostic and Mary Daly. Dynamics across the US yield curve will have a big say in whether the dollar can hold on to its new gains. Anyway, we had called for a recovery in DXY to 106.00 as the Fed would have likely pushed back against the dovish repricing. The rebound in yields should put a floor under the dollar, but we suspect some reassurances from the data side will be needed for another big jump in the greenback.

CEE: Busy end to the week Today we have a busy end to the week in the CEE region. October inflation will be published in Hungary. We expect a further fall from 12.2% to 10.3% year-on-year, slightly below market expectations, while the central bank expects 10.5%. Inflation therefore has a high bar for hawkish surprises in our view, and the lower number should support further market bets on rate cuts. However, this week the HUF seems to have fully disconnected from rates and is not interested at all. We believe the relationship should resume sooner or later and lower rates will drive EUR/HUF higher. Moreover, the EU money story seems to come into play soon, which should bring more volatility and a weaker HUF – at least initially. On the other hand, we remain bullish on the HUF in the long term. In the Czech Republic, we will also see the inflation print for October. We agree with the market expecting an increase from 6.9% to 8.4% YoY mainly due to the base effect from last year. The Czech National Bank (CNB) is expecting 8.3%. However, the survey range is quite wide and skewed towards higher numbers, which could encourage more paying flow in the rates space and support the CZK. On the other hand, we will also see the CNB minutes today, which we think could be more dovish than the press conference following the central bank's decision last week and could push EUR/CZK in the opposite direction. Looking ahead, however, we expect to see weaker economic numbers and hesitant statements from the CNB, which we think will boost rate cut bets and push EUR/CZK higher again. In Poland, Fitch will publish a rating review after the close of trading. We do not expect any changes this time but it will be the first review after the elections and it will be interesting to see the assessment of the loose fiscal policy and the plan for a record sovereign bond issuance next year.

GBP: Softening on the crosses EUR/GBP continues to grind higher - driven we believe by the re-pricing of the Bank of England (BoE) tightening cycle into 2024. Yesterday the market moved to price the first full 25bp BoE cut in June next year and had 78bp of easing priced in by the end of the year. Having switched to forward guidance at the last BoE meeting - keeping restrictive rates for an extended period - the market will now be on the lookout for this language changing. For example, Mexico's central bank, Banxico, recently switched language from 'extended period' to 'some time' presumably forewarning the start of easing in February/March next year. Quite a lot of BoE easing is already priced in for next year, however, meaning it is not certain EUR/GBP has to trade up to 0.8800 just yet. Cable is eating into this week's rally and could dip further unless something like today's US jobless claims disappoint.

GBP: ECB vs. BoE story dominates Dovish commentary from the ECB has now seen investors pricing ECB rate cuts several months ahead of the Bank of England (BoE) next year and expectations build of a deeper easing cycle in the Eurozone than in the UK. We disagree with that pricing and think the BoE will deliver more hikes than the ECB next year. This probably means that EUR/GBP does not need to spend too much time below 0.8600. Indeed, 0.8500 represents very strong support and we remain happy with our forecasts of EUR/GBP edging up to the 0.88/0.90 area into next year. The UK data calendar is very quiet this week, with just Friday's release on inflation expectations of note. The bigger driver of EUR/GBP this week will be any ECB pushback against dovish pricing of their 2024 policy cycle.

The Swiss National Bank appears slightly more dovish The SNB kept its key rate unchanged at 1.75%, as expected. Its message is slightly more dovish, but it doesn’t mean rate cuts are imminent.   A slightly more dovish message As expected, the Swiss national bank decided to keep its key rate unchanged at 1.75% at its December meeting, its level since June 2023. The SNB's communication is more dovish, indicating that they are clearly not considering any further rate hikes. Against a backdrop where consumer price inflation stood at 1.4% in Switzerland in November, the 6th consecutive month below 2%, this is not surprising. But the SNB is going a little further than that. First, it has revised its inflation forecasts downwards. It is now forecasting average inflation of 2.1% in 2023, 1.9% in 2024 and 1.6% in 2025, compared with 2.2%, 2.2% and 1.9%, respectively, at its previous meeting. The SNB is still expecting inflation to rebound in the coming months on the back of higher energy prices, rents and VAT. Nevertheless, it acknowledges that inflation has been weaker than expected in recent months and that "In the medium term, reduced inflationary pressure from abroad and somewhat weaker second-round effects are resulting in a downward revision". The inflation forecasts for the entire period are, therefore, within the price stability range, defined by the SNB as being between 0 and 2% inflation. According to the SNB, the balance of risks for inflation forecasts is also well balanced, with the risks of an upside surprise being as great as those of a downside surprise. In addition, although it still states that it is "willing to be active in the foreign exchange market as necessary", it no longer explains how. In recent quarters, the SNB has been buying Swiss francs to reinforce its appreciation, which has had the effect of reducing imported inflation but has also worsened the competitiveness of domestic exporters. The SNB no longer seems to favour the idea of an even stronger Swiss franc and could now start selling the currency again, which would support exports and, therefore, economic growth in Switzerland. This is a major change for the SNB.   But rate cuts are not just around the corner The message is, therefore, slightly more dovish. However, there is nothing to suggest that rate cuts will be forthcoming soon. Firstly, the SNB's target is asymmetrical, as it wants to achieve inflation of between 0 and 2%. Today's inflation forecasts fall squarely within this target, and the SNB expects inflation to be at 2% in the second and third quarters of 2024. These inflation forecasts offer little argument for an imminent rate cut. In addition, the SNB has a tool to steer monetary policy other than its policy rate: its interventions on the foreign exchange markets. It is likely to use this instrument first and start selling Swiss francs before considering rate cuts. It confirmed this between the lines during the press conference. Finally, the SNB's key rate is at 1.75%, a fairly unrestrictive level close to the level of expected inflation. Past interest rate rises are, therefore, much less damaging to the economy than they are in the United States and the Eurozone.   Against this backdrop, the SNB is likely to take a much longer pause than the Fed and the ECB. Rate cuts will probably come, but much later than the other central banks. At this stage, we are expecting the first rate cut to come in December 2024, compared with the first rate cuts expected in the first half of the year for the Fed and the ECB. Moreover, the scale of the rate cuts is likely to be much smaller than elsewhere. Total rate cuts in 2024 and 2025 could be in the region of 50bp or even a maximum of 75bp in Switzerland.   FX: SNB no longer focusing on FX sales The SNB confirmed today that it is no longer focusing on FX sales. This is consistent with our EUR/CHF update in our 2024 FX Outlook published last month and supports our view that EUR/CHF can remain stable near 0.95/0.96 next year. 

EUR: ECB versus data Unlike officials at the Federal Reserve, European Central Bank members have managed to deliver a more coordinated pushback on rate cuts, both at last week’s policy meeting and in post-meeting communication. Governing Council member Peter Kazimir said the risks of premature cuts are bigger than those of keeping monetary tight for too long, and fellow hawk Pierre Wunsch highlighted how rate cuts cannot be discussed until wages move to a level that is compatible with the inflation target. Despite that, it still appears quite hard to dissuade the market from its conviction that rates will start to be cut in April. Data remains the missing link for a more material repricing in ECB rate expectations, and another miss by the Ifo yesterday in Germany suggests we are not at peak pessimism yet on the eurozone economic outlook. EUR/USD can trade above 1.10 during the holiday period as the dollar enters a seasonally soft period, but rate differentials are still too depressed to argue for a sustainable rally above 1.10 just yet.

CAD: Macklem turns dovish The Canadian dollar is lagging other pro-cyclical currencies at the start of this week after Bank of Canada Governor Tiff Macklem said in a TV interview yesterday that he expects rates to be cut next year. This is a surprise statement by Macklem, who only two weeks ago reiterated the hawkish bias in the BoC policy statement. Offering a timeline for rate cuts appears inconsistent with the BoC's claim that it “remains prepared to raise the policy rate further if needed” and likely validates the market’s pricing for 100bp of easing next year – despite Macklem’s caveats on the disinflation progress. Despite our view of a dollar decline and outperformance of pro-cyclical currencies next year, we expect the Canadian dollar to underperform other commodity currencies as the BoC cuts rates aggressively (we estimate 150bp in 2024) on a grim economic outlook and as the loonie suffers from its correlation with US economic data.

CEE: Sinking beacon of hope After a very busy calendar last week, this week we take a little break in the CEE region. The final December inflation numbers in Poland will be released today and core inflation tomorrow. We do not expect any changes in the headline rate and anticipate a drop in core from 7.3% to 6.9% year-on-year. On Wednesday, we will see PPI numbers in the Czech Republic, one of the last numbers before the February Czech National Bank meeting. Thursday will see the release of industrial production in Romania and PPI in Poland on Friday. Otherwise, we will continue to monitor the dynamic political situation in Poland. The state budget draft for this year will be discussed this week in parliament. In the Czech Republic, we are getting closer to that CNB meeting and we should hear more from the board in the next two weeks before the blackout period begins. After surprisingly low inflation for December, there is the possibility of a rate cut of 50bp instead of 25bp, which is our base case scenario here for now. CEE FX remains the last island of resistance within the EM space, which is under selling pressure this year. However, last week proved that the CEE region is not the exception and bearish sentiment has arrived here, too. The market is starting to price in more cutting than we expect, not only due to global direction but also inflation surprising to the downside. And even in Poland, where the central bank continues its hawkish tone, FX has not escaped losses. Despite the inflation surprise in the Czech Republic, we believe the koruna will remain resilient and should not go to the 24.700-800 range. On the other hand, Hungary's forint has been ignoring rapidly falling rates for some time, which we believe leaves HUF vulnerable, and we expect rather weaker levels this week above 380 EUR/HUF. Poland's zloty remains the only currency in the region supported by a higher interest rate differential. However, political noise seems to be entering the market and PLN is rather weaker. Therefore, we see EUR/PLN around current levels for the next few days despite positive market conditions.