FX market

CEE: Fair level reached before next move

Yesterday's data published in Poland was fairly mixed, indicating cautious signs of recovery in industry and construction but weaker growth in retail sales. The general economy gained momentum in the fourth quarter of last year but the pace slowed after the third quarter. December is again hopeful that a recovery is coming. Today's calendar is essentially empty except for Hungarian wage data. It gets more interesting in the bond space. In Poland, the first auction will take place today after the recent sell-off and political tensions. At the same time we saw a hawkish turn from the National Bank of Poland. So today's auction will test where demand is after recent events.

The FX market opened the week in CEE in line with our expectations yesterday. PLN managed to stabilise around 4.360 per euro and for now we don't see too much bias either way until we see more progress on the political side. EUR/CZK remains in the 24.700-800 range where it is

Gold's Resilience Tested Amid Rising Dollar and Bond Yields

CEE: US Dollar Continues to Haunt the Region's FX Market

ING Economics ING Economics 30.05.2023 09:01
CEE: US dollar remains the region's nightmare The second print of first quarter GDP in the Czech Republic will be published today. Besides the GDP breakdown, we will also see the wage bill, which has been mentioned several times by the Czech National Bank as a potential reason for a rate hike in June.   Tomorrow, inflation for May and the details of first quarter GDP in Poland will be published. We expect headline inflation to fall from 14.7% to 13.0% YoY, below market expectations, mainly due to fuel and energy prices. On Thursday, we will see PMI numbers across the region, where we expect a slight deterioration in sentiment across the board.   Later, we will see state budget data in the Czech Republic, which posted its worst-ever result in April, raising questions about additional government bond issuance. The European Parliament is also scheduled to hold a session on Thursday, which is expected to cover the Hungarian EU presidency and is also likely to touch on the topic of EU money and the rule of law.   The FX market, as usual in recent weeks, will be dominated by the global story and the US dollar. So, even this week, CEE FX will not be in a bed of roses. We still see the Polish zloty as the most vulnerable, which despite some weakening in the past week remains near record highs. The market has built up a significant long position in PLN over the past two months.   Plus, we may hear more election noise. Moreover, the significant fall in inflation should push the interest rate differential lower. Thus, we see EUR/PLN around 4.540.   The Czech koruna remains the most sensitive currency in the region against the US dollar, which should be the main driver this week. On the other hand, the reversal in the rate differential has been indicating a reversal in EUR/CZK for a few days now.   Thus, at least a stable EUR/USD could allow the koruna to move toward 23.600. The Hungarian forint can expect a headline attack from the European Parliament this week, and given the current strong levels, we could easily see weaker levels again closer to 375 EUR/HUF.   However, we believe the market will use any spike to build long positions in HUF again.
Dovish Tone in CEE Puts Pressure on FX: Czech Republic, Hungary, and Poland in Focus

Dovish Tone in CEE Puts Pressure on FX: Czech Republic, Hungary, and Poland in Focus

ING Economics ING Economics 05.06.2023 10:23
CEE: Dovish tone to put pressure on FX The Czech Republic's 1Q wage data will be published today, which is perhaps a more important number for the central bank these days than inflation itself. The Czech National Bank expects 9.1% YoY, monthly data and national accounts point to a higher number, but it should remain below 10%, the pain threshold mentioned by the board. Tomorrow, we will see industrial data in the Czech Republic and retail data in Hungary. Later, the decision by the National Bank of Poland will be announced. In line with the market, we expect rates to remain unchanged. The main focus will be the governor's press conference, which we expect to be dovish in tone, supported by a fall in inflation. Hungary's industrial production will be released on Wednesday, and we expect a 6.5% YoY decline, well below market expectations. Then on Thursday, we will see May inflation in Hungary, which is expected to fall further from 24.0% to 22.1% YoY, slightly below market expectations. Hungary's state budget result and Romania's second estimate of 1Q GDP will also be released.     In the FX market, we will be watching the echoes of Friday's US labour numbers, which bring positive sentiment, but also higher dollar rates. However, a stronger dollar will still keep pressure on CEE FX and we remain bearish. Moreover, local numbers across the region should favour a dovish tone this week, pushing interest rate differentials lower. After rallying in recent days, we think the Polish zloty and Hungarian forint are most at risk. The market has built large long positions in both currencies and the dovish tone this week should lead to some market rebalancing. Thus, we should see a return closer to 4,520 EUR/PLN and 372 EUR/HUF.  
Euro Gains Momentum as ECB's Lagarde Signals Peak Rates Reached

CEE: Dovish NBP Press Conference and Bearish View on Zloty

ING Economics ING Economics 07.06.2023 08:51
CEE: Dovish NBP leads us to bearish view on zloty Today, another series of economic data from the CEE region continues. Industrial production data will be published in Hungary and retail sales for April in the Czech Republic. Later, the Czech National Bank will release intervention numbers for April – but it can be assumed that the central bank was not active in the market given the current EUR/CZK level. The last time the central bank intervened in the FX market was last October.     Later today, at 3pm local time, we will see a press conference from the Governor of the National Bank of Poland. As expected, rates remained unchanged yesterday and the statement didn't show anything new either. Today's press conference will be the main focus of the market and we can expect a rather dovish tone supported by lower-than-expected inflation for May.     The situation in the FX market in the region remains unclear in what direction it will take. The Polish zloty will of course be the main focus. Given the expected dovish tone of the governor, the market is likely to be open to price in more monetary easing, pushing the interest rate differential down.   However, this is not the main driver at the moment and if anything, it is more global sentiment that is deciding the zloty. At the same time, it is hard to see what role the MinFin operation in the FX market may play in the strongest levels of the zloty since June 2021. However, the strong long market positioning and dovish NBP leads us to a rather bearish view on the zloty and we see a rather higher EUR/PLN after the end of the press conference today above 4.490.
French Economy Faces Challenges Amid Disinflationary Trend

Central European and Eurasian Local Rates Outlook: Opportunities and Challenges

ING Economics ING Economics 14.06.2023 07:59
Czech Republic - local rates views summary The CZK 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. We believe the market has gone too far with the pricing of the CNB rate cuts this year and along with the heavy received market positioning we see an opportunity for an upward re-pricing of the IRS curve. CZGBs offer good value with the prospect of a near halving of supply next year.     Hungary - local rates views summary We expect that the market will continue to favour the HUF, which will continue to maintain a significantly higher carry within the region in the second half of the year. In our view, the playing field for the forint will be in the range of EUR/HUF 368-378 and we target year-end at 372. The market is pricing in a large portion of NBH normalisation, but we believe that the fast disinflation and a strong forint will support further market bets on policy easing. We see a lower and steeper curve. HGBs are getting expensive after the recent rally.   Poland - local rates views summary The Polish zloty has closed the gap with the CEE region and although it should remain on a strengthening trajectory it is no longer undervalued in our view. We target 4.45 EUR/PLN for the end of the year. However, currently, the significant long positioning of the market and election noise over the coming months will be hurdles. The NBP is the most dovish central bank in the CEE region and with inflation falling, the market will price in more rate cuts both this year and next. Moreover, inflation has the potential to surprise to the downside. POLGBs are seen as the cheapest bonds in CEE, while funding is fully under control, pricing too many negatives.     Romania - local rates views summary The new range is likely to be 4.94-4.98 EUR/RON, with no expectation of moves to the lower levels. We envisage at least one more upward shift before the year-end. We target the EUR/RON level of 5.02 for the end of the year. ROMGBs offer the best funding situation and disinflation profile in the CEE region. In addition, they are the only ones to offer a steep curve and reward for duration. However, spreads against CEE peers and heavy long positioning may indicate a problem for the next rally. The overall direction remains clear, further gains may be at a slower pace.   Ukraine - local rates views summary FX reserves exceeded nearly US$36bn in May, for the first time since 2011. This reflected continued foreign aid and lower monthly costs of FX interventions. This significantly deceases near-term odds of another devaluation of the UAH, as the central bank may prefer a stable currency to combat inflation. The fundamentals behind UAH remain unsupportive though. Ukraine has benefited from declines in global commodity prices and the CPI is dampened by the high statistical base. However, we expect the NBU to wait for a more decisive period of disinflation and start rate cuts in early 2024. Public and external financing needs have been met by foreign flow. The fiscal position is set to deteriorate further but improve gradually in the medium term.     Kazakhstan - local rates views summary KZT appreciation since 3Q22 was based on the substantial atypical net private capital inflow, which could prove volatile. USD/KZT has now almost recovered to levels seen before February 2022, and the new fiscal rule assumes lower state sales of FX out of NFRK. In addition, risk of Russia-related secondary sanctions may push Kazakhstan be more cautious about trade flows   Turkey - local rates views summary Under the CBT policy with indirect FX interventions and regulations to control locals' FX demand, gross FX reserves have been under pressure since the beginning of this year. Given this backdrop, there is a consensus that points to a normalisation in the conduct of the monetary policy. We target 26.0 USD/TRY for the end of the year. The CBT has maintained its purchases from the secondary market, still below 6% vs the limit set at 7% of total assets of the CBT weekly statement. In the aftermath of elections, signals implying a change in policy direction are likely to determine the bond market outlook. Markets are pricing in more orthodoxy in the policy ahead than anticipated earlier.
Unleashing the Potential: The Czech Koruna's Strong Stand and Market Expectations

Unleashing the Potential: The Czech Koruna's Strong Stand and Market Expectations

ING Economics ING Economics 14.06.2023 14:46
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)    
Recovering Economy: Ukraine's International Reserves Surge, Limited Devaluation Risks, and Positive Growth Outlook

Recovering Economy: Ukraine's International Reserves Surge, Limited Devaluation Risks, and Positive Growth Outlook

ING Economics ING Economics 15.06.2023 08:25
Country strategy: Limited short-term risks to the hryvnia Ukraine’s international reserves exceeded nearly US$36bn in May, for the first time since 2011. This reflected continued foreign aid and lower monthly costs of FX interventions (c.US$2bn in May, down from the monthly peak of US$4bn in June 2022). This significantly deceases near-term odds of another devaluation of the hryvnia, as the central bank may prefer a stable currency to combat inflation. The fundamental factors behind the hryvnia remain unsupportive though. Ukraine is running a significant trade deficit, as exports collapsed in 2022, while imports remained quite stable. With the central bank aiming to re-liberalise the FX market at some point this signals risk of further devaluation in the future.   Forecast summary     Positive growth in 2023 to follow 30% GDP wartime losses The Russian invasion in 2022 has brought huge human, social and economic losses to Ukraine. The country’s GDP shrank by nearly 30% in 2022. According to the World Bank estimates, sectoral output declined by about 60% in industry, 25% in agriculture and 20% in services. In the second half of 2022, severe disruptions to businesses were caused by damage to energy infrastructure, which impacted around 40% of Ukraine’s power grids. Out of about 20 million refugees, 8 million are yet to return home. The country’s economy seems to have passed the greatest shock and, on our estimates, real GDP is set to recover gradually and reach 2% positive growth in 2023, and accelerate in subsequent years, driven mainly by consumption.    GDP growth (%)
Strong Demand Continues: US Weekly Grain Inspections Update

Fiscal Challenges and External Dynamics: Assessing Uzbekistan's Economic Landscape

ING Economics ING Economics 15.06.2023 08:33
Fiscal position leaves little room for more generosity With public debt at 36% of GDP (almost entirely external FX, long maturity) liquid FX state savings (UFRD) at 11% of GDP and a recent increase in expenditures to an historical high of 36% of GDP, Uzbekistan has little room for further fiscal generosity. In 2022, the consolidated deficit narrowed by 0.5ppt to 3.9% of GDP on higher revenues, and for 2023-24 higher tax measures and cost control (following the constitutional reform) are planned, potentially leading to further reduction in the deficit to 2-4% of GDP. However, one third of the revenues are commodities-dependent and volatile, while high inflation may require extra social spending. The deficit is expected to be financed primarily via external borrowing, but the NBU expects the share of external borrowing to drop from 66% to 52% in 2023.   Key fiscal indicators (% of GDP)   Sum fails to benefit from geopolitical spillover Uzbekistan’s current account improved from its standard 5-7% of GDP deficit to just 0.8% in 2022 thanks to the inflow of remittances from Russia. However, the balance of trade did not improve, as higher exports of commodities (one third of exports) and extra trade with Russia (share of Russia in exports went up from 12% to 16%) were offset by higher imports (Russia share remained 20%).   That said, improvement in the current account failed to be absorbed by the FX market (unlike Georgia and Armenia), as UZS has gradually depreciated by 6% against USD since mid-2022 and is now 6% below end-2021 levels, like RUB and KZT. This suggests some pressure on the capital account but, on the positive side, Uzbekistani Sum’s depreciation risks seem to be under control.    Balance of payments and USD/UZS
US Corn and Soybean Crop Conditions Decline, Wheat Harvest Progresses, and Weaker Grain Exports

CEE Central Banks Set for Monetary Policy Meetings: Positive Outlook and Rate Expectations

ING Economics ING Economics 19.06.2023 09:53
CEE: Good news for the region This week will see several central bank meetings in the region. Tomorrow, the Hungarian National Bank will meet for its monetary policy decision. We expect another 100bp cut in the overnight deposit rate, as in May, from 17% to 16%, in line with expectations. The forward guidance and the tone will remain unchanged as well, in our view. This means that the approach remains cautious and gradual and the decisions ahead are still data- and sentiment-driven. On Wednesday, we will see the Czech National Bank meeting leaving rates unchanged. The main question here is what the vote split will be. In May, three of the seven members voted for a rate hike. Since then we have seen lower inflation and wage growth numbers, which could change the outcome of the vote, but we expect the CNB to continue its hawkish tone. We will also see industrial and labour market data from Poland on Wednesday. The Central Bank of Turkey is scheduled to meet on Thursday, the first since the appointment of new economic names. We expect a big jump in interest rates from 8% to 20% and see upside risks.   On the FX market, the higher EUR/USD is clearly good news for the CEE region, and on top of that market remains in a positive mood and the drop in gas prices, which jumped last week to the highest levels since April, should play into the hands of HUF and CZK. And we should see positive news for FX at the local level as well. Markets like the story of monetary policy normalisation in Hungary and we believe the market will take the opportunity of a weaker forint as an opportunity to build new HUF positions and benefit from the significant carry. Thus, we expect the forint to return to 370 EUR/HUF. In the Czech Republic, the market is currently pricing in a first rate cut as early as September. In our view, the CNB governor will try to postpone the dovish market pricing, which, together with global factors, should help the koruna back to stronger levels below 23.70 EUR/CZK.
Tokyo Raises Concerns Over Yen's Depreciation, Considers Intervention

FX Daily: Inflation Takes Center Stage as Geopolitical Events Have Limited Impact

ING Economics ING Economics 26.06.2023 10:38
FX Daily: Inflation remains the market’s priority Events in Russia have had little discernible impact on the FX market so far. Instead, the hot topic of high inflation and what policymakers are prepared to do about it remains the market's priority. This will be at the top of the agenda at this week's ECB's annual symposium in Sintra. Expect another mixed week in FX markets and possible BoJ intervention.   USD: Geopolitics has yet to make its mark Events in Russia this weekend have so far had very little impact on global financial markets. There has been no flight to quality rush into the short end of the US Treasury market (two-year yields are down only 2bp since Friday), crude oil failed to hold onto some very modest gains in Asia, and Asian equity price action was muted. In FX, it is hard to discern any flight to quality into the dollar, nor discernible outperformance of defensive currencies like the Japanese yen and the Swiss franc. The muted response probably reflects i) a lack of clarity over what comes next after this challenge to President Putin's authority and ii) financial markets having already experienced a year of a stronger dollar and higher energy prices after the Russian invasion of Ukraine.   Instead, the market is very much focused on inflation. Both central bankers and governments are under fire for having kept monetary and fiscal policy respectively too loose for too long. These (or at least monetary policy anyway) will be the hot topic for this week at the ECB annual symposium in Sintra. Many of the G7 central bank governors are in attendance and presumably will deliver a hawkish message, similar to the one that Federal Reserve Chair Jerome Powell delivered to Congress last week.   This means that yield curves look to remain very inverted as investors assess the degree of looming recession and that the dollar will stay strong against those currencies without a monetary defence – i.e., USD/JPY stays bid. In addition to Powell's comment at Sintra on Wednesday, the US highlight this week will be the release of the core PCE inflation data for May. This is released on Friday. Expected at 0.4% month-on-month, another high reading for core inflation suggests there can be no let-up in the Fed's hawkishness.   DXY can probably bounce around in a 102.00-103.00 range this week, while USD/JPY should edge closer to the 145 intervention zone.  
GBP: Strong June Retail Sales Spark Sterling Rally

Poland's Economic Outlook: National Bank of Poland Poised for Easing Measures

ING Economics ING Economics 04.07.2023 14:21
Monitoring Poland: National Bank of Poland looks set to ease Surprisingly, neither the ruling PiS party nor the opposition unveiled new social spending plans in June. We expect new announcements just before the elections, possibly in September. We expect a fast decline in CPI in 2H23, supporting – in our view – NBP policy easing in 2023. This offers a positive outlook for POLGBs, at least until the general elections.   We expect no policy changes from the National Bank of Poland (NBP) in July. The central bank will present new projections, likely reflecting a series of downside CPI surprises. However, we estimate that the chances of a rate cut after the August Monetary Policy Council break have increased to 65-70%. This follows the guidance provided by some MPC members, including President Adam Glapinski, and the recent lower-than-expected CPI print in June. We see more than one interest rate cut in 2023 as possible. Our short-term inflation forecast is optimistic, with CPI falling to single digits in August – something which should further strengthen the MPC’s dovish stance. Our long-term CPI forecasts are substantially less favourable though. Core inflation could stabilise around 5% year-on-year in 2024-25, given the tight labour market, another significant rise in the minimum wage and valorisation of the 500+ child benefits (to PLN800 per child per month).   Risks to our 2023 GDP of 1.2% growth forecast are mounting. Second-quarter growth most likely underperformed (with flat or negative year-on-year growth), given poor retail sales, industrial output and an only 45.1 point manufacturing PMI print in June. Consumer sentiment is improving but from a very low level. Moreover, real wages are set to only start to grow sometime in the third quarter, after around a year of negative growth. Also, the government’s recent cheap mortgage scheme has come too late to give a boost to housing construction this year. Given the likely lacklustre internal demand, net exports are set to be a key GDP driver this year.   FX and money markets The zloty continues to benefit from a mix of current account surplus, more FX sales on the market by the Ministry of Finance, inflows from Foreign Direct Investment and portfolio capital. Some investors seem to expect a more market-friendly political environment after the parliamentary elections. We expect all those factors to persist at least until the elections. We expect €/PLN to gradually sink towards, or slightly below, 4.40 in the coming weeks.   Domestic debt and rates Despite higher overall 2023 borrowing needs after the state budget amendment, the government aims to finance these via a reduction of the sizeable cash buffer (PLN117bn as of the end of May) and FX funding, hence limiting Polish government bonds (POLGBs) issuance compared to the initial budget bill. In tandem with the expectations for monetary policy easing (fueled by the recent CPI print), this suggests further drops in yields across the curve and some tightening in asset swaps.
Industrial Metals Outlook: Assessing the Impact of China's Stimulus Measures

CEE Economies Show Resilience Amid Global Central Bank Focus

ING Economics ING Economics 24.07.2023 10:24
CEE: Recovery despite global story This week, the calendar is light again in the region and the focus will be on the global central bank story. But before that, today we will see consumer confidence in the Czech Republic. Tomorrow, the Hungarian National Bank will meet and we expect the cutting cycle to remain unchanged, i.e., 100bps in the effective rate to 15%. Tomorrow we will also see labour market data in Poland and Hungary. In the Czech Republic, we can expect a few Czech National Bank (CNB) speakers ahead of Thursday's blackout period. Otherwise, market attention will be driven by the global story.  In the FX market, we saw the region's rally stall last week, with the Hungarian forint and Czech koruna in particular weakening once again. The National Bank of Hungary meeting should be the main driver for the forint this week and we expect a hawkish tone versus market expectations to be positive for FX. The forint remains our favourite currency in the region due to by far the highest carry and attractive current levels. Moreover, we see the forint lagging behind Friday's renewed improvement in market conditions. Thus, in the short term, we expect a pullback back to 370 EUR/HUF. A stronger US dollar as a result of central banks in the second half of the week may be a problem and might also be an obstacle for the Czech koruna. However, it could be supported by the hawkish remarks of the CNB board members, so we expect a recovery from the weakest levels since March this year to 23.90 EUR/CZK
Hungary's Budget Deficit Grows, Raising Concerns Over Fiscal Targets

CEE PMI Numbers Deteriorate, FX Market Sees Record Highs and Weakness in Local Currencies

ING Economics ING Economics 01.08.2023 10:24
CEE: PMI numbers to deteriorate PMI numbers across the region will be released today. We expect a deterioration in sentiment in Poland and the Czech Republic as the eurozone and German numbers indicated earlier. On the other hand, we expect some improvement in Hungary. Later today we will also see the state budget result in the Czech Republic. Given that these numbers disappointed almost everywhere across the region in the first half of the year, they now have more attention and a clear impact on potential additional bond issuance over the rest of the year. However, in the Czech Republic, June showed the first improvement and although July may show a renewed deterioration, the second half should point to an improvement overall. We saw a wild opening in the FX market yesterday. The Polish zloty pushed its record highs with EUR/PLN touching 4.400. The Czech koruna rushed for gains ahead of Thursday's Czech National Bank (CNB) meeting and almost erased all losses from the past two weeks. This may be due to market expectations of a more hawkish CNB this week or the end-month rebalancing of Czech government bonds within the index, which this month was several times larger than usual. In the first case, we can expect even lower EUR/CZK in the days ahead. On the other hand, if the bond rebalancing was the driver, the koruna should stabilise today. Our main focus yesterday, however, was probably the Hungarian forint, which weakened again to its lowest level since early July and briefly touched 388 EUR/HUF. We still don't see many reasons on the local side to explain the current HUF weakness. That's why we instead analyse global factors and especially EUR/USD as we mentioned yesterday. That said, while we should be seeing an end to the HUF weakness, we also cannot expect a big reversal unless we see a significant recovery in EUR. These EUR/HUF levels also open the question of where the pain threshold is for the Hungarian central bank, which will not like the current situation. However, for any verbal action, we would probably need to see more weakening above the 390 EUR/HUF level in our view.
EUR/USD Faces Resistance at 1.0774 Amid Inflation and Stagflation Concerns

CEE Weekly Outlook: Romania's Rates Unchanged, Inflation Data Ahead

ING Economics ING Economics 07.08.2023 08:58
CEE: No change in rates or tone in Romania Another busy week in the CEE region. Today, the Czech Republic's industrial production, foreign trade, and construction numbers will be released. Industry is showing signs of recovery. However, the only growing sector is automotive. Later today, we will see a decision from the National Bank of Romania. A rate change is not on the table, however, a new forecast will be published and we would like to hear some comments on the current inflation and leu developments. Inflation and budget numbers will be released tomorrow in Hungary. We expect a massive drop in July inflation from 20.1% to 17.3% YoY. The central bank expects 17.5% and the market 17.7% YoY. We don't expect much change from June for the state budget, which would be good news for Hungarian bonds. Then on Thursday, the Czech Republic's July inflation will be released. We expect a further decline from 9.7% to 8.7% YoY, in line with the market. The Czech National Bank expects 8.9% here. In the FX market, we have seen high volatility and weakness in the region driven mainly by the US dollar and we do not expect much change this week. EUR/CZK has moved to 24.25 after the CNB intervention regime ended and the market does not seem to want to test higher levels for now. However, we think Thursday's inflation release has the potential to surprise to the downside, which should raise the bets for a central bank rate cut, and the market may test weaker CZK levels again. In the meantime, we expect a rather stable CZK of around 24.25 EUR /CZK. The Hungarian forint finally rebounded and erased some losses on Friday. However, the main driver still seems to be the US dollar, which cannot offer much positive for EM FX this week either. So maybe we can see some recovery in the forint today, but a strong USD and a big jump in inflation down for HUF is not a positive factor.
SEK Faces Risks as Disinflation Accelerates Ahead of Riksbank Meeting

CEE Inflation Update: Czech Republic Faces Downside Inflation Surprises Amid Stable FX Market

ING Economics ING Economics 10.08.2023 09:16
CEE: Another dovish message for CNB Today's calendar includes the publication of July inflation in the Czech Republic. We expect a further fall from 9.7% to 8.7% YoY in the headline number. The market expects 8.8% and the CNB's new forecast paints 8.9% YoY. Previously released inflation in Poland and Hungary confirmed food prices dropped by 1.2% and 1.4% MoM in July, implying a drop in the Czech Republic as well. At the same time, core inflation, in particular, has surprised to the downside in recent months. Overall, we think the bar for hawkish surprises is high and see the potential for further downside surprises in the Czech Republic today. In the FX market, EUR/CZK has been surprisingly stable since last week's CNB meeting, when the Board ended the intervention regime. One may wonder if the CNB is not active in the market again. The available central bank balance sheet data only shows us last week. However, these numbers imply zero CNB activity as expected. Thus, we think today's inflation numbers may open the way for the market to test higher EUR/CZK above 24.30 and confirm that the central bank is fine with a weaker koruna. Elsewhere in the region, we are curious to see what impact yesterday's jump in gas prices up nearly 40% will have. For now, the CEE FX reaction has been muted, but in any case, this is not good news for the region. US inflation will also come into play today, while EUR/USD has been the main driver for HUF and PLN in recent days. Overall, we are on the bearish side for CEE FX today.
Italy Eases Windfall Tax Impact Amid China's Deflation, Focus on US Inflation Report

Italy Eases Windfall Tax Impact Amid China's Deflation, Focus on US Inflation Report

Ed Moya Ed Moya 10.08.2023 09:31
Italy cushions windfall tax blow China deflation to spark stimulus efforts US five-year inflation breakeven nears peak set in April 2022 Yesterday, the euro took a big hit after Italian Premier Meloni’s cabinet approved a 40% levy on lenders’ extra profits.  Today was all about damage control as the Italian government had to tweak and ease up this crushing windfall tax on banks. The initial tax plan crushed the European banking sector, but that might see some relief now that the finance ministry clarified that the levy won’t surpass 0.1% of a firm’s assets and that banks who have delivered increased interest rates to depositors won’t be greatly impacted. The euro was steadying earlier, but a recovery of yesterday’s losses seems unlikely. The FX market appears to be struggling for major moves ahead of the US inflation report and that is somewhat surprising considering the deflationary numbers that came from China last night.  China saw both consumer and producer prices decline together for the first time since early in the pandemic.  China’s producer prices have been steadily dropping for 10th consecutive months, which should support disinflation hopes from most of the advanced economies.  China’s core CPI is still in positive territory, but that shouldn’t prevent officials from being a little bit more aggressive with stimulus. Even with China’s falling prices, some investors are still not yet confident that US inflation will come all the way down to the Fed’s target.  One of the long-term inflation gauges, the US five-year inflation breakeven remains elevated and close to the high made in April 2022.  Tomorrow’s inflation report could send this long-term measure above 2.5% or cool the steady rally that took hold since June.       Leading up to the US CPI report, EUR/USD has been consolidating between the 1.0920 and 1.1040 levels. Any significant upside surprises could support a stronger dollar, which could trigger a tentative break down below 1.0940 short-term support level.  An in-line inflation report could see the current trading range hold up, while a cooler-than-expected might support a rally towards the 1.1100 handle.      
Russian De-Dollarisation and Shift Towards Yuanisation: Recent Developments and Implications

Russian De-Dollarisation and Shift Towards Yuanisation: Recent Developments and Implications

ING Economics ING Economics 17.08.2023 09:50
The situation changed dramatically in 2022, when the sanctions were focused on SDN sanctions covering around two thirds of the banking sector, expanded to the central bank and the government and started covering Russia’s key exports. This resulted in a new wave of de-dollarisation, which this time involved the FX market and led to the replacement of USD, EUR and currencies of other sanction-imposing countries with ruble and yuan.   Starting in 2022, official Russian data on the FX breakdown has become scarce, but some bits of information are still available. Looking at the trade statistics, it appears that Russian foreign trade is becoming more China- and CNY-focused (Figure 34), and the usage of CNY is more active on the imports side (Figure 35) leading to a trade deficit in CNY. The higher share of China in Russia’s foreign trade is by no means a new trend, but the more active usage of CNY instead of USD and EUR is new. By now, almost 40% of Russia’s foreign trade turnover is with China, and around 80% of the bilateral trade is in CNY.     On the foreign asset side, very little is known, as the Central Bank of Russia (CBR) stopped disclosing the structure of its international reserves, and the international investment position of the Russian economy. The Finance Ministry is still disclosing the structure of the National Welfare Fund (the sovereign fund), which contributes to the funding of the central bank’s international reserves.   The available data suggests that the government had de-dollarised already in 2020, with USD and EUR replaced by CNY and gold, which have become the only two liquid assets available to the Russian government since 2022 (Figure 36). Since 2023, the Russian government has been selling CNY in 1H23 as per the fiscal rule (due to the under collection of budgeted fuel revenues versus its plan).   The dramatic change in the FX structure of trade and quite possibly the capital flows finally led to a material de-dollarisation of the FX market (Figure 37), something that was not possible during the first wave. According to the Bank of Russia, the CNY-leg of the FX trading on the Russian FX market reached 15-40%, pushing down the USD share to 30- 50% depending on the segment.  
Market Highlights: US CPI, ECB Meeting, and Oil Prices

FX Market Update: Chinese Turmoil and G10 Volatility

ING Economics ING Economics 18.08.2023 09:52
FX Daily: Quiet G10 markets despite Chinese turmoil Beijing continues to fight the recent turmoil on multiple fronts: real estate, financial, and the FX market. Overnight, the PBoC set the CNY fixing with the largest gap to estimates in order to curb bearish speculation. Despite all the turmoil in China, G10 volatility has remained capped, and this is probably why Japanese authorities are not intervening.   USD: Chinese authorities go all in to defend the yuan Developments in the distressed Chinese financial and property sector are emerging as the most prominent driver for market sentiment, especially after the Fed minutes proved to have limited implications for central bank expectations and developed market calendars are quite light. Overnight, Chinese authorities turned their focus on the FX market, deploying what is now regarded as the biggest defence of the yuan via fixing guidance on record. The People's Bank of China (PBoC) fixed USD/CNY at 7.2006, significantly below the average estimate of 7.305, which marks the largest gap compared to the estimate since the poll started in 2018. Today’s PBoC move follows yesterday’s reports that state-owned banks were asked by Chinese authorities to step up yuan interventions to reduce FX volatility. We could also see a cut in FX reserve requirements, often considered as a tool to avert sharp CNY depreciation. So far, the spillover into G10 currencies has been limited. The highly exposed AUD is down 1.4% this week, a relatively contained slump considering the amount of bad news that has piled up in the past few days. This is probably a signal of how AUD was already embedding a good deal of negatives related to China and how markets are expecting government intervention to avert black swan scenarios. This morning, the emergency yuan fixing has left FX markets quite untouched, with the exception of USD/JPY trading on the soft side, likely due to Japan’s service inflation hitting 2% for the first time in 30 years overnight. Incidentally, the pair is well into FX intervention territory but is probably missing enough volatility to worry Japanese officials. Still, the oversold conditions of JPY and the threat of interventions are likely going to exacerbate any USD/JPY downside corrections. The US calendar is empty today and the focus will likely be on bond market dynamics after back-end yields touched fresh multi-year highs yesterday. The combined effect of high yields and growing risks in China suggests the balance of risks is moderately tilted to the upside for the dollar. A return to 104.00 in DXY remains a tangible possibility in the coming days.
Navigating the Path Ahead: Inflation, Catalysts, and Lessons from the 1970s

CEE Economic Outlook: Focus on Data and Rates

ING Economics ING Economics 21.08.2023 10:05
CEE: Rates matter again This week, we will see a number of hard data from the Polish economy. Industrial production, PPI and wage numbers will be released today. Our economists expect another 0.5% year-on-year decline in industrial production – better than market expectations. However, the slowdown in China and the weak performance of German industry shows the risk of another weak result for Polish industry. On the other hand, wage growth should confirm steady double-digit growth. Tomorrow, Poland will remain the main focus with the release of retail sales and construction data. Thursday will see consumer confidence data in the Czech Republic, which could show further improvement thanks to a rapid slowdown in inflation.  On the sovereign rating side, Fitch will publish a review of the Czech Republic on Friday. The agency downgraded the outlook to negative from AA- stable in May last year, mainly due to the deteriorating fiscal policy trajectory. However, the negative scenario has not materialised since then, and the government has unveiled a large consolidation package resulting in a rough halving of the public deficit next year. We therefore expect the outlook to return to stable.   In the FX market, CEE currencies have gained some ground in the past week after some time despite the fact that US dollar levels are not making the region's life easier. In our view, the gains were mainly driven by rising market interest rates and support from the interest rate differential. Moreover, after weeks of weakness, more balanced positioning across the region is also helpful. Interest rates drivers seem to be back after a long time, and Friday's move indicates further gains for today. The Polish zloty seems most tempting from this perspective, almost touching 4.50 EUR/PLN last week, which we believe is the upper ceiling of the current 4.40-4.50 range. Unless today's data surprises on the negative side, we could see further gains below 4.44 EUR/PLN. The Czech koruna should finally settle below 24.00 EUR/CZK. 
Why India Leads the Way in Economic Growth Amid Global Slowdown

FX Markets React as Saudi Oil Cuts Boost Energy Prices

ING Economics ING Economics 06.09.2023 12:19
FX Daily: The Saudi squeeze brings energy back into the FX mix If the beleaguered euro and yen did not have enough to worry about already, they now have to cope with Brent oil trading above $90/bl as the Saudis extend their supply cuts through to year-end. Unless the US ISM services index somehow collapses today, expect the dollar to remain in demand. EUR/JPY, however, could start to turn lower based on positioning.   USD: ISM services the only threat to an otherwise bullish story The relentless rise of the dollar continues. The DXY yesterday pushed up to the highest levels since March as US yields once again edged higher. While the busiest day in US investment-grade corporate issuance in three years has surely been weighing on US treasuries, the FX market has also come under the spell of higher energy prices. The Saudis have this week confirmed their plan to roll over their 1mn barrels per day supply cut into December. This is keeping conditions tight in crude energy markets and now sees Brent trading over $90/bl. To FX markets, that provides an unwelcome reminder of the spike in energy prices last summer which had hit the energy-importing currencies in Europe and Asia. US energy independence and its net exporter status leave the dollar well-positioned for higher energy prices. It would seem the only real threat to the dollar in the near term would be some dramatic re-assessment of growth prospects. That brings us to the key piece of US data this week – today's release of the ISM services index for August. A sharp fall in this series did weigh on the dollar at the tail end of last year, but unless this really surprises with a sub-50 reading today, expect the dollar to hold onto recent gains and consolidate at these high levels before the US August CPI release this time next week. In terms of G3 currencies, we might see some re-adjustment, however. Speculators still seem to be holding onto long euro positions, while they continue to run very short positions against the yen on the carry trade. USD/JPY upside now looks more limited as rhetoric from Tokyo threatens imminent intervention. Positioning suggests EUR/USD support levels are more vulnerable. EUR/JPY may now struggle to get over the 158.50 area and may be about to embark on a correction to the 155 area.
Unlocking the Future: Reforms in Korea's FX Market Amid Demographic Shifts

Unlocking the Future: Reforms in Korea's FX Market Amid Demographic Shifts

ING Economics ING Economics 12.09.2023 08:59
Looking more closely at the FX market, Korea has seen value in accumulating sizable FX reserves to provide protection against financial turmoil. However, the government has accelerated efforts over the past few years to adopt a more market-friendly approach and to lift restrictive policy measures. These have improved the efficiency of the capital market along with Korea’s international investment position, which has shifted from a net debtor to a net creditor position amid growing concerns over a rapidly ageing population. The challenge for Korea is that right after the Asian financial crisis its merchandise surplus drove the current account surplus, but ageing is a potential cause of the decrease in savings and the current account surplus. Given that Korea has been experiencing one of the fastest demographic changes, there is a possibility that the current account balance will turn into a deficit in the near future. It thus becomes more important for policymakers to establish a virtuous circle of a current account surplus and net foreign asset accumulation, which is one of the major motives behind the ongoing FX market reform efforts.    The reforms Starting with a pilot in early 2024, the largest of the proposed FX reforms is to open up the onshore interbank FX market to Registered Foreign Institutions (RFIs). Currently, the onshore KRW market is only open to local institutions based onshore in Korea. These local institutions can also access the offshore Non-Deliverable Forward market. This means that, unlike the curves in Malaysia, the onshore and offshore KRW forward curves trade very close to each other. The biggest benefit here, however, is that RFIs could quote deliverable KRW forwards to their offshore customers and then clear those with an approved local broker in Korea.  The next biggest reform is the extension of FX trading hours. The current onshore trading hours of 0900-1530 KST will be extended to 0200 KST - a couple of hours after the London close. We hear that local Korean banks in Seoul are preparing to run night shifts to meet this need.   Further proposals centre on the development of market infrastructure in line with global FX markets (aggregators, third-party settlement), plus administrative measures for the new relationships between RFIs and locals and adjustments to the regulatory system. Structural reforms of Korea's FX market     Source: Korean Ministry of Economy and Finance
BoJ Governor Hints at Possible Policy Normalization Amidst FX Market Speculation

BoJ Governor Hints at Possible Policy Normalization Amidst FX Market Speculation

FXMAG Team FXMAG Team 14.09.2023 08:52
In an interview with the Yomiuri, BoJ Governor Kazuo Ueda indicated that the central bank could have enough information and data by the end of the year to judge whether wages will continue to rise at a pace that is necessary to achieve the 2% price stability target. However, back in April, Governor Ueda indicated that next year’s annual wage bargaining will likely become a key factor in deciding the future of monetary policy but the BoJ could make a decision on whether the 2% inflation target accompanied by wage growth is achievable at an earlier point depending on the data that becomes available beforehand. The governor’s latest remark is a repeat of his previous comments saying the central bank is of the view that it is ready to normalise its policies once conditions are satisfactory for such moves. Instead, the latest comment was likely made to combat speculative moves in the FX market, which could act as a hindrance to monetary policy. As long as markets are pricing in a Fed rate cut sometime next year, the BoJ will likely continue with the current monetary easing policies. We continue to expect that the BoJ will likely start the normalisation process by exiting from the YCC framework in CY25, once the global economy enters the next cyclical recovery. The BoJ will likely remain cautious of any major policy changes as long as the central bank maintains that “there are extremely high uncertainties for Japan's economic activity” and to not repeat past mistakes of premature policy tightening, especially as the government is maintaining a strong commitment to the Abenomics policy framework to pull Japan completely out of deflation. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in CY24 under the judgement that the global economy will remain strong.   In an interview with the Yomiuri, BoJ Governor Kazuo Ueda indicated that the central bank could have enough information and data by year-end to judge whether wages will continue to rise at a pace that is necessary to achieve the 2% price stability target. Markets reacted to the interview as a hint that the central bank could start the normalisation process much earlier than previously anticipated.   However, Governor Ueda has made similar remarks before, and the latest comment is likely not a change in the central bank’s or the governor’s views. Back in April, Governor Ueda indicated during his press conference that next year’s annual wage bargaining will likely become a key factor in deciding the future of monetary policy, but the BoJ could make a decision on whether the 2% inflation target accompanied by wage growth is achievable at an earlier point depending on the data that becomes available beforehand.   The governor’s latest remark is a repeat of his previous comments saying the central bank is of the view that it is ready to normalise its policies once conditions are satisfactory for such moves. The remark was likely made to combat speculative moves in the FX market, which could act as a hindrance to monetary policy. In other words, the governor’s statement is likely similar to those typically made by the Minister of Finance and other MoF officials where they issue warnings on volatility in the FX market verbally but do not implement any actual intervention moves.
EU Investigates Chinese Electric Vehicle Subsidies, Impact on the EV Market

Paring Back of BoE Hike Expectations Weakens GBP Gains

FXMAG Team FXMAG Team 14.09.2023 10:01
GBP: Paring back of BoE hike expectations encouraging reversal of GBP gains The pound has continued to trade at weaker levels overnight after selling off yesterday following the release of the latest labour market report from the UK. It has resulted in EUR/GBP rising back above the 0.8600-level while cable is continuing to hold just above support from the 200-day moving average that comes in at around 1.2430. The pound has been undermined recently by the paring back of BoE rate hike expectations as we highlighted in our latest FX Weekly report (click here). The UK rate market has become less confident that the BoE will deliver multiple further rate hikes in the current tightening cycle. There are 19bps of hikes priced in for next week’s MPC meeting and 39bps of hikes by February of next year. It implies that the UK rate market is currently attaching around a 50:50 probability to the BoE delivering one final hike after next week’s 25bp hike which is viewed as almost a one deal. The main trigger for the paring back of BoE rate hike expectations have been comments from BoE officials including Governor Bailey and Chief Economist Pill who have signalled that the rate hike cycle is close to an end and that keeping rates higher for longer is preferred to the alternative of hiking rates further towards 6.00%. Next week’s updated forward guidance from the MPC meeting will be important in determining whether the BoE plans to deliver one final hike or is becoming more confident that it has raised rates enough   At the same time the recent data flow from the UK is helping to dampen BoE rate hike expectations as well. While yesterday’s labour market report did show average weekly earnings hitting a new high of 8.5% in July, the details of the report provided more encouragement that labour demand continues to weaken and wage growth is beginning to slow. Employment dropped by 207k and the unemployment rate ticked up further to 4.3% as it moved further above the cycle low of 3.5% from las August. Back in the August MPR the BoE had forecast the unemployment rate would rise to only 4.4% by the end of next year. Job vacancies also continued to fall and moved below 1 million. After stripping out more volatile bonuses, regular pay growth in the private sector has slowed in recent months coming. The HMRC’s median pay measure even declined by -0.5%M/M suggesting the peak has been reached for pay growth.   Furthermore, it has just been revealed that services sector growth was much weaker than expected at the start of Q3. After expanding by 0.5%M/M in June, service sector output contracted by -0.5% in July. It has reinforced the pound’s downward momentum  
UAW Strike Impact and FX Market Implications Amid Ongoing Negotiations

UAW Strike Impact and FX Market Implications Amid Ongoing Negotiations

Kenny Fisher Kenny Fisher 19.09.2023 14:02
UAW President Fain on latest offer – “It’s definitely a no-go.” A prolonged UAW strike could disrupt the US growth exceptionalism trade The impact of the strike is not as disruptive but it could lead to a lengthier period of production disruption The three Detroit automakers and the United Auto Workers (UAW) union appear to be far from ending the strike that has now entered its fourth day.  It is clear that American car manufacturers, Ford (F), GM (GM), and Stellantis (STLA) will be having higher costs once a deal is reached.  There has been some relief that onset of the strike won’t be as bad as initially thought.  The longer the hold out, the greater the impact on the economy. These negotiations might last a while as many autoworkers haven’t had a meaningful raise in over 15 years.  The union is looking for wage increases of 36% over the next four years, which matches what chief executives have received. In addition to wage increases, they are also looking to bring back pensions.  Over the weekend, the UAW rejected a 20% offer from both Ford and GM, while Stellantis proposed a 21% increase. The longer this strike lasts, the greater the impact on the economy, which will eventually impact the FX market.  An extended strike that lasts more than a couple weeks, will start to rattle markets.  It seems, Wall Street has priced in a short strike already, but the risk that this lasts more than a couple weeks is growing. USD/JPY  Daily Chart   The dollar-yen trade remains focused on the BOJ commitment to an ultra-easy monetary stance and US growth exceptionalism and rising risks of more Fed tightening. If this week’s central bank actions by the Fed and BOJ don’t lead to any surprises, the bullish trend could remain intact.  Unless growth prospects start to take a turn for the worse in the US, the dollar might remain supported over the short-term. Key upside targets the 148.25, while downside eyes the 147.00 region.  Major support remains at the 144 level, while upside targets remain the 150 price barrier.  
Czech National Bank Prepares for Possible Rate Cut in November

Czech National Bank Prepares for Possible Rate Cut in November

ING Economics ING Economics 25.09.2023 11:21
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.  
US Bond Market Sell-Off Sets Tone for FX and Risk Assets

US Bond Market Sell-Off Sets Tone for FX and Risk Assets

ING Economics ING Economics 26.09.2023 14:48
FX Daily: US bond market sets the FX tone The ongoing sell-off in the US bond market continues to set the tone – not just for FX markets but for risk assets in general. A heavy slate of US Treasury auctions this week and rising concern over a US government shutdown on Saturday is sending implied volatility higher and may trigger some more profit-taking on carry trade strategies.   USD: Focus on Treasuries again The dollar continues its grind higher and probably the biggest market talking point is the ongoing bearish steepening of the US Treasury curve. Speaking to our bond strategists, they think this is currently being driven by two factors. The first is the ongoing upward revision to where the Fed Funds rate settles after the next Fed easing cycle. Looking at the forward curve for one-month USD OIS rates, investors now see the low point in any future Fed easing cycle at around 4.00% in three years's time. Rather incredibly, at the start of this year, the market had seen the low point for Fed Funds in three years' time down at 2.70%. The second factor weighing on Treasuries is this week's $134bn auction of two, five and seven-year notes – which takes place over the next three days. This comes ahead of a potential US government shutdown this Saturday, where hard-right Republicans in the House seem to be holding out against a stop-gap spending bill. In the background remains a threat of another downgrade of US sovereign rates on the back of an 'erosion of governance'. Apart from the rise in US yields, we have now started to see a rise in implied volatility in the US Treasury market. This will prove a headwind to carry trade strategies and could prompt the unwinding of some of the most heavily invested positions. We would worry about the Mexican peso here, which also faces Banxico unwinding its dollar forward book in less than benign conditions. Another popular target currency in the carry trade – the Hungarian forint – may actually find some support from the local central bank today (see below).  In general, however, the continued rise in US yields is making for a less benign environment and favours risk reduction. Whilst higher US yields may push USD/JPY close to 150, they also increase the risk of an equity setback. That is why we think an instrument like the one-month USD/JPY downside risk reversal may be too conservatively priced. And in general, we would say commodity currencies remain vulnerable, especially those like the South African rand and Latam currencies – this latter group were hit hard during the early August sell-off in Treasuries. DXY can probably stay bid through this if activity currencies come under pressure and technical analysts will be dusting off calls for a move to the 107.20 area.
The Complex Factors Influencing Gold Prices in 2023: From Interest Rates to China's Impact

EUR/USD: Exploring the Potential Bottom at 1.0200 Amid US Treasury Yield Surge

ING Economics ING Economics 27.09.2023 12:54
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.
Navigating Uncertainties: RBNZ's Inflation Gamble, Election Dynamics, and Kiwi Dollar's Path Ahead

Navigating Uncertainties: RBNZ's Inflation Gamble, Election Dynamics, and Kiwi Dollar's Path Ahead

ING Economics ING Economics 05.10.2023 08:48
RBNZ inflation forecasts still look like a gamble The RBNZ’s latest inflation projections – from the August Monetary Policy Statement – show an optimistic scenario for disinflation, largely based on assumptions about the impact of restrictive monetary policy and slowing domestic as well as external demand. Those assumptions are, however, met with the risks associated with: a) the extra spending deployed by the government from May, b) the recent spike in oil prices, c) residual supply-related inflationary effects of severe weather events, and d) the still unclear impact of booming net migration on wages and prices (easing labour supply, but raising demand for housing and other services). We think that the RBNZ will continue to acknowledge those risks to inflation and strike a generally hawkish tone this week, with the aim of keeping inflation expectations capped. However, a rate hike seems unlikely a week before the elections and before having seen official CPI and jobs data. Once inflation figures are out, the RBNZ may tolerate a slightly higher-than-anticipated third quarter headline CPI (the projection is for 6.0% YoY), but expect greater scrutiny on non-tradable inflation (projected at 6.2%).    RBNZ inflation forecasts   Polls point to a National-led coalition Advance voting in New Zealand has already been going on for a couple of days, while physical election day will take place on Saturday 14 October, with the preliminary results starting to be released from 7PM local time. Latest opinion polls suggest that the incumbent Labour Party (of former Prime Minister Jacinda Ardern) should lose its parliament majority to the opposition National Party. A centre-right coalition, led by the National Party and supported by the right-wing ACT New Zealand is currently projected to secure somewhere between 45% and 50% of parliament seats, possibly short of a majority. A coalition may need to include the nationalist NZ First to secure enough seats: latest polls give NZ First just above the 5% threshold required to enter parliament without winning a single-member seat.   Single party and coalition opinion polls ahead of the 14 October election   The monetary policy implication of a potential shift in government First of all, the past few years have taught to take pre-election polls with a pinch of salt. Secondly, the impact of politics on NZD are generally quite limited. This time though, a change of government (assuming the polls are right and NZ First joins a National-led coalition) might have some implications for the RBNZ further down the road. The National Party recently published its pre-election fiscal plan, where it pledged more fiscal discipline compared to Labour. Specifically, National said it would spend around NZD3bn less than Labour over four years, with the aim of reducing debt at a faster pace. If the RBNZ links any rebound in CPI to additional fiscal spending, the change in government could suggest a less hawkish RBNZ in the longer run. Another aspect to consider is the RBNZ remit. Over the summer, the National Party Finance spokeperson Nicola Willis pledged to restore the central bank’s sole focus on the inflation target. This would imply removing the RBNZ’s dual mandate (maximum sustainable employment) and potentially reviewing the additional housing stability objective that were added in 2018 and in 2021 respectively. The first – and more impactful – effect would suggest higher RBNZ rates in the medium and long term; while removing housing affordability objective would in theory be a dovish argument, the stricter inflation target would likely overshadow any housing-related considerations.   FX: Domestic factors can determine relative NZD performance The Kiwi dollar has resisted USD appreciation better than other commodity currencies in the past month, and we have seen AUD/NZD fall from the recent 1.0900 peak to below 1.0700 – also thanks to the Reserve Bank of Australia hold this week. We think that the RBNZ will continue to signal upside risks to their inflation forecasts and keep the door open to more tightening if needed this week, but it is very likely that November will be a much more eventful policy meeting for NZD, with new rate and economic projections being released and after the inflation and jobs data for the third quarter are released. Expect some significant NZD volatility around the two data releases this month: we are still of the view that inflation can surprise to the upside, so expect some positive impact on NZD. Markets are currently pricing in 15bp of tightening by November. When it comes to the election outcome, a hung parliament with parties failing to find a working coalition would be the worst scenario for NZD. Should either Labour or National manage to lead a government after the vote, we expect the market implications to be mostly bonded to those for the RBNZ remit (and less so to fiscal spending). So, very limited in the event of Labour staying in power, and moderately positive for NZD (negative for NZ short-dated bonds) in a win by the National Party as markets may speculate on the remit being changed to focus solely on a strict inflation target. The chances of a hike in November will, however, depend almost entirely on CPI and jobs data, not on the vote.   Expect any meaningful swing in NZD to be mostly visible in the crosses, especially in the shape of relative performance against other commodity/high-beta currencies. A combination of National electoral win (and workable coalition) and CPI surprise could make AUD/NZD re-test the 1.0580 May low and slip to 1.0500. NZD/NOK is another interesting pair, with more room to recover after a large summer slump: a return to 6.60 is possible in the above scenario. When it comes to NZD/USD, the swings in USD continue to be an overwhelmingly dominant driver. With US 10-year yields still moving higher and our rates team pointing at 5.0% as a potential top, we see more downside for NZD/USD in the near term. NZD-positive developments domestically would not prevent a drop to 0.5800 if US bonds remain under the kind of pressure we have seen in recent weeks. In the medium run, we still expect US data to turn negative and the Fed to start cutting in first quarter 2024, which should pave the way for a sustained NZD/USD recovery.
Rates Spark: Escalating into a Rout as Bond Bear Steepening Accelerates

Market Jitters: Strong US Jobs Data Sparks Fear of Tightening Labor Market and Rising Yields

Michael Hewson Michael Hewson 05.10.2023 08:54
The fear of strong jobs By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Even a hint of an improving US jobs market sends shivers down investors' spines.  This is why the stronger than expected job openings data from the US spurred panic across the global financial markets yesterday. Although hirings and firings remained stable, the financial world was unhappy to see so many job opportunities offered to Americans as the data hinted that the US jobs market could be going back toward tightening, and not toward loosening. And that means that Americans will keep their jobs, find new ones, asked better pays, and keep spending. That spending will keep US growth above average and continue pushing inflation higher, and the Federal Reserve (Fed) will not only keep interest rates higher for longer but eventually be obliged to hike them more. Alas, a catastrophic scenario for the global financial markets where the rising US yields threaten to destroy value everywhere. PS. JOLTS data is volatile, and one data point is insufficient to point at changing trend. We still believe that the US jobs market will continue to loosen.  But the market reaction to yesterday's JOLTS data was sharp and clear. The US 2-year yield spiked above 5.15% after the stronger than expected JOLTS data, the 10-year yield went through the roof and hit the 4.85% mark. News that the US House Speaker McCarthy lost his position after last week's deal to keep the US government open certainly didn't help attract investors into the US sovereign space. The US blue-chip bond yields on the other hand have advanced to the highest levels since 2009, and the spike in real yields hardly justify buying stocks if earnings expectations remain weak. The S&P500 is now headed towards its 200-DMA, which stands near the 4200 level. The more rate sensitive Nasdaq still has ways to go before reaching its own 200-DMA and critical Fibonacci levels, but the selloff could become harder in technology stocks if things got uglier.  In the FX, the US dollar extended gains across the board. The Reserve Bank of New Zealand (RBNZ) kept the interest rate steady at 5.5% as expected. Due today, the ADP report is expected to show a significant slowdown in US private job additions last month; the expectation is a meagre 153'000 new private job additions in September. Any weakness would be extremely welcome for the rest of the world, while a strong looking data, an - God forbid – a figure above 200K could boost the Federal Reserve (Fed) hawks and bring the discussion of a potential rate hike in November seriously on the table.   The EURUSD consolidates below the 1.05 level, the USDJPY spiked shortly above the 150 mark, and suddenly fell 2% in a matter of minutes, in a move that was thought to be an unconfirmed FX intervention. Gold extended losses to $1815 per ounce as the rising US yields increase the opportunity cost of holding the non-interest-bearing gold.  The barrel of American crude remains under pressure below the $90pb level. US shale producers say that they will keep drilling under wraps even if oil prices surge to $100pb, pointing at Joe Biden's war against fossil fuel. A tighter oil supply is the main market driver for now, but recession fears will likely keep the upside limited, and September high could be a peak. 
The Fear of Strong Jobs: How US Labor Market Resilience Sparks Global Financial Panic

The Fear of Strong Jobs: How US Labor Market Resilience Sparks Global Financial Panic

Ipek Ozkardeskaya Ipek Ozkardeskaya 05.10.2023 08:55
The fear of strong jobs By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Even a hint of an improving US jobs market sends shivers down investors' spines.  This is why the stronger than expected job openings data from the US spurred panic across the global financial markets yesterday. Although hirings and firings remained stable, the financial world was unhappy to see so many job opportunities offered to Americans as the data hinted that the US jobs market could be going back toward tightening, and not toward loosening. And that means that Americans will keep their jobs, find new ones, asked better pays, and keep spending. That spending will keep US growth above average and continue pushing inflation higher, and the Federal Reserve (Fed) will not only keep interest rates higher for longer but eventually be obliged to hike them more. Alas, a catastrophic scenario for the global financial markets where the rising US yields threaten to destroy value everywhere. PS. JOLTS data is volatile, and one data point is insufficient to point at changing trend. We still believe that the US jobs market will continue to loosen.  But the market reaction to yesterday's JOLTS data was sharp and clear. The US 2-year yield spiked above 5.15% after the stronger than expected JOLTS data, the 10-year yield went through the roof and hit the 4.85% mark. News that the US House Speaker McCarthy lost his position after last week's deal to keep the US government open certainly didn't help attract investors into the US sovereign space. The US blue-chip bond yields on the other hand have advanced to the highest levels since 2009, and the spike in real yields hardly justify buying stocks if earnings expectations remain weak. The S&P500 is now headed towards its 200-DMA, which stands near the 4200 level. The more rate sensitive Nasdaq still has ways to go before reaching its own 200-DMA and critical Fibonacci levels, but the selloff could become harder in technology stocks if things got uglier.  In the FX, the US dollar extended gains across the board. The Reserve Bank of New Zealand (RBNZ) kept the interest rate steady at 5.5% as expected. Due today, the ADP report is expected to show a significant slowdown in US private job additions last month; the expectation is a meagre 153'000 new private job additions in September. Any weakness would be extremely welcome for the rest of the world, while a strong looking data, an - God forbid – a figure above 200K could boost the Federal Reserve (Fed) hawks and bring the discussion of a potential rate hike in November seriously on the table.   The EURUSD consolidates below the 1.05 level, the USDJPY spiked shortly above the 150 mark, and suddenly fell 2% in a matter of minutes, in a move that was thought to be an unconfirmed FX intervention. Gold extended losses to $1815 per ounce as the rising US yields increase the opportunity cost of holding the non-interest-bearing gold.  The barrel of American crude remains under pressure below the $90pb level. US shale producers say that they will keep drilling under wraps even if oil prices surge to $100pb, pointing at Joe Biden's war against fossil fuel. A tighter oil supply is the main market driver for now, but recession fears will likely keep the upside limited, and September high could be a peak.   
Renewable Realities: 2023 Sees a Sharp Slide as Costs Surge

FX and Rates Markets: Analyzing Scenarios for the Czech Koruna and CNB's Cutting Cycle

ING Economics ING Economics 27.10.2023 15:03
What to expect in FX and rates markets The Czech koruna has been in a narrow range of 24.60-70 EUR/CZK for the past two weeks, which we believe is still an acceptable level for the CNB to start a cutting cycle. The current level of market rates indicates slightly stronger levels below 24.60. Thus, if global conditions allow, the koruna could still strengthen by next week's meeting. However, if the CNB delivers a rate cut, we see room to price in more cuts in the future, which would push EUR/CZK into the 24.80-25.00 range, based on the current strong relationship between the CZK and market rates. On the other hand, if the CNB does not deliver a rate cut, we believe the central bank has little to offer on the hawkish side, given that a cut seems inevitable. Thus, in response, the koruna may strengthen below 24.50; however, we do not expect it to stay there for longer. The market is currently pricing in a rate cut of more than 30bps for the November meeting, indicating a strong dovish bias in the market, and also about 25bps for a rate cut in December. Looking ahead, the market may be overestimating the size of the rate cut in 1Q next year, but generally speaking, we see expectations for the year ahead as fairly priced. However, looking forward, the CZK IRS curve, in our view, shows a significant underestimation of the CNB's cutting cycle. Specifically at the long end of the curve, we think the 10y has the potential to trade 100bps lower and at the moment this is probably the biggest mispricing in the CEE space. However, the condition here is the start of a CNB cutting cycle and also a noticeable drop in core rates, which seem unlikely to be met for a while. Thus, the most interesting segment is probably 1-3y, which can still be influenced by the CNB itself and we see room for more rate cuts to be priced in here. In bond space, our view has remained unchanged for a long time. This year's issuance is almost covered, plus the state budget has been surprising on the positive side in recent months. Thus, the supply of CZGBs is starting to decline, and MinFin is pre-funding next year, which already indicates a significant decline in borrowing needs and supply of CZGBs. Together with the start of the cutting cycle, we thus see CZGBs as cheap in ASW and also relative to CEE peers at the moment.
CEE Outlook: Potential Positive Shift in Czech Republic's Rating Amid Improved Fiscal Outlook

CEE Outlook: Potential Positive Shift in Czech Republic's Rating Amid Improved Fiscal Outlook

ING Economics ING Economics 27.11.2023 14:25
CEE: Possible improvement in the rating outlook for the Czech Republic Today, the calendar in the region is again basically empty. This morning we will see consumer confidence in the Czech Republic, which rebounded in October, but so far, we don't see an improving trend. Moody's will publish a rating review of the Czech Republic after the close of trading. The agency has held a negative outlook for the Aa3 rating since last August. We see some chance here for an improvement in the outlook to move towards greater stability. The main reason for the downgrade was the country's dependence on energy from Russia and the deteriorating fiscal outlook. Both issues have been resolved this year, and we thus think that an improvement in the outlook is a matter of time. In the FX market, yesterday's news of possible EU money for Hungary was greeted by a strengthening HUF. While yesterday's news involves a different part of the EU money than was mostly mentioned in the context of the conflict over the rule of law, it is good news for Hungary. As we mentioned after the National Bank of Hungary (NBH) meeting this week, for new FX gains, we need to see some new triggers, such as the EU money progress. We therefore think yesterday may unlock the next wave of HUF appreciation. Market rates have stabilised, and we might even see some upside after a long string of declines. EUR/HUF has thus probably consolidated slightly above 380 and fell below that level yesterday. Looking ahead, 378 EUR/HUF should not be too ambitious a target if EUR/USD stays at high levels today.
European Markets Rebound Amid Global Uncertainty, US PPI Miss, and Rate Cut Speculation

FX Daily: Dollar Resilient Post-JOLTS, Euro Faces Headwinds

ING Economics ING Economics 12.12.2023 12:43
FX Daily: Hard to buck the euro downtrend The dollar has shown resilience after disappointing JOLTS job openings data yesterday, leaving EUR/USD under pressure as the euro’s idiosyncratic negatives fuel bearish momentum. Today, the Bank of Canada may deliver a hawkish hold despite worsening growth, giving some help to the Canadian dollar.   USD: Showing resilience The larger-than-expected drop in October’s JOLTS job openings has offered new reasons to speculate on more rate cuts from the Federal Reserve next year, but the stronger ISM services figures in November have worked as an offsetting factor in terms of FX impact. AUD and NZD are rallying this morning, helped by stronger fixing for the yuan from the People's Bank of China (PBoC) after yesterday’s downgrade of China’s outlook by Moody’s. However, the dollar has remained rather supported across the board even after the disappointing JOLTS figures, a signal that markets are taking a less aggressive stance in FX following non-conclusive evidence of deterioration in the US outlook.   Speaking of non-conclusive evidence, it’s worth noting that the ADP payrolls being released today have no predictive power for actual payrolls. Still, markets have often moved on out-of-consensus ADP numbers. Today, expectations are 130k. MBA mortgage applications, final third-quarter labour cost data, and October trade balance figures are also on the calendar today but should not move the market. We suspect markets are holding a more cautious stance as we head into the key US payroll figures on Friday and the Fed meeting next week, where there is a good probability the FOMC will deliver a protest against rate cut bets – especially if data fails to turn lower. When adding the soft idiosyncratic momentum faced by the euro, we remain modestly bullish on the dollar into the FOMC.
FX Daily: Yen Bulls on Alert as Focus Shifts to US Payrolls and BoJ Speculation

FX Daily: Yen Bulls on Alert as Focus Shifts to US Payrolls and BoJ Speculation

ING Economics ING Economics 12.12.2023 14:06
FX Daily: Yen bulls turn to US payrolls The big yen rally has been exacerbated by positioning factors, but markets may keep speculating on a BoJ December hike unless Japanese officials protest against hawkish bets before the meeting. A bigger upside risk for USD/JPY is today’s US payrolls, which could paint a still resilient jobs market picture, and help the dollar.   USD: Payrolls may ruin the party for the yen The exceptional rally in the yen remains the biggest story in FX at the moment. The size of the drop in USD/JPY and the volatile intraday price-action are a clear consequence of the heavy short positioning on the yen into this round of hawkish speculation on Japanese rates. USD/JPY net longs amounted to 42% of open interest on 28 November, as per the latest CFTC data. Despite technical factors such as positioning having exacerbated the yen moves, we’d be careful to call for a peak in the JPY rally just yet. First, because there is likely a lot more bearish JPY positioning to be scaled back by speculators, second – and most importantly – because markets may not have many incentives to unwind bets on a December BoJ hike unless Japanese or central bank officials step in to tame the speculation before the meeting. Our view remains that the BoJ would prefer to exit negative rates policy at either the January or April meeting, when the Outlook Report accompanies the policy decision and Governor Kazuo Ueda can use an upside revision in inflation to justify a rate hike. Incidentally, the final release of 3Q GDP in Japan signalled a worse economic contraction (-0.7% QoQ) than previously estimated. We’ll be looking at USD/JPY closely today not only to gauge how much markets continue to speculate on BoJ tightening but also in relation to US risk events. The US jobs figures for November are a key turning point for markets' ongoing speculation on Federal Reserve easing in 2024. The payrolls’ consensus number is 183k, but soft JOLTS job openings and ADP payrolls (despite the latter having no predictive power for official figures) suggest markets may be positioned for a weaker reading. Our economics team forecasts 180k, and we suspect the US jobs market may still prove a bit more resilient than expected – triggering some unwinding of dovish Fed bets and supporting the dollar. The US calendar also includes the December University of Michigan surveys; markets will mostly be moved by the inflation expectations numbers, which are expected to have declined. All in all, we see some upside risks for the dollar today. The high sensitivity of USD/JPY to US rates means that US payrolls could trigger a rebound in the pair. That said, the ongoing bullish momentum in the yen on the back of hawkish domestic bets means sellers of USD/JPY may re-emerge around the 145.0 area.  
UK Inflation Dynamics Shape Expectations for Central Bank Actions

The Finish Line: Reflections on 2023 and a Glimpse into 2024

Ipek Ozkardeskaya Ipek Ozkardeskaya 02.01.2024 12:48
The Finish Line By Ipek Ozkardeskaya, Senior Analyst | Swissquote Bank   Here we are, on the last trading day of the year. This year was completely different than what was expected. We were expecting the US to enter recession, but the US printed around 5% growth in the Q3. We were expecting the Chinese post-Covid reopening to boost the Chinese growth and fuel global inflation, but a year after the end of China's zero-Covid measures, China is suffocating due to an unexpected deflation and worsening property crisis. We were expecting last year's negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks. None happened.  The biggest takeaway of this year is the birth of ChatGPT which propelled AI right into the middle of our lives. Nasdaq 100 stocks close the year at an ATH, Nvidia – which was the biggest winner of this year's AI rally dwarfed everything that compared to it. Nvidia shares gained more than 350% this year. That's more than twice the performance of Bitcoin – which also had a good year mind you.   Besides Nvidia, ChatGPT's sugar daddy Microsoft, Apple, Amazon, Meta, Google and Tesla – the so-called Magnificent 7 generated almost all of the S&P500 and Nasdaq100's returns this year. And thanks to this few handfuls of stocks, Nasdaq100 is set for its best year since 1999 following a $7 trillion surge.   The million-dollar question is what will happen next year. Of course, we don't know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024. T  The other thing is, the S&P500's direction next year is unclear as the Federal Reserve (Fed) is expected to start chopping the interest rates, with the first rate cut expected to happen as early as much with more than 85% probability. So what will the Fed cuts mean for the S&P500? Looking at what happened in the past, the S&P500 typically rises after the first rate cut, but the sustainability of the gains will depend on the underlying economic fundamentals. Lower rates are good for the S&P500 valuations EXCEPT when the economy enters recession within the next 12-months. So that backs the idea that I have been trying to convey here since weeks: lower US yields will be supportive of the S&P500 valuations as long as the economy remains strong, and earnings expectations hold up.    For now, they do. The S&P500 earnings will certainly end a bit better than flat this year, and the EPS is expected to rise by more than 10% next year. The Magnificent 7 are expected to post around 22% EPS growth next year. But note that, these expectations are mostly priced in, so yes, there will still be a hangover and a correction period after a relentless two-month rally triggered a broad-based risk euphoria among investors. The S&P500 is about to print its 9th consecutive week of gains – which would be its longest winning streak in 20 years.  In the FX, the US dollar index rebounded yesterday as treasury yields rose following a weak sale of 7-year notes. But the US dollar is still set for its worse year since 2020. Gold prepares to close the year near ATH, the EURUSD will likely reach the finish line above 1.10 and the USDJPY having tested but haven't been able to clear the 140 support. In the coming weeks, I would expect the EURUSD to ease on rising expectations from the ECB doves, and/or on the back of a retreat from the Fed doves. We could see a minor rebound in the USDJPY if the Japanese manage to calm down the BoJ hawks' ambitions. Overall, I wouldn't be surprised to see the US dollar recover against most majors in the first weeks of next year.  In the energy, crude oil remains downbeat. The barrel of American crude couldn't extend rally after breaking the $75pb earlier this week, and that failure to add on to the gains is now bringing the oil bears back to the market. The barrel of US crude sank below the $72pb as the US oil inventories slumped by more than 7mio barrels last week, much more than a 2-mio-barrel decline expected. The latter brought forward the demand concerns and washed out the supply worries due to the Red Sea tensions. Note that crude oil is set for its biggest yearly decline since 2020; OPEC's efforts to curb production and the rising geopolitical tensions in the Middle East remained surprisingly inefficient to boost appetite in oil this year. 
Taming Inflation: March Rate Cut Unlikely Despite Rough 5-Year Auction

Turbulent Start: Dollar Surges in New Year, Unwinding Dovish Bets and Questioning Equity Valuations

ING Economics ING Economics 03.01.2024 14:41
FX Daily: A dollar rally to start the New Year The dollar jumped yesterday as investors started to return from the long Christmas break. Markets are unwinding some dovish bets, and questioning stretched equity valuations, ultimately favouring defensive bets in FX. The dollar also tends to seasonally outperform at the start of the year. Today, the focus moves back to data, as well as the FOMC minutes.   USD: Dollar seasonally strong in January and February Defensive bets dominated in global markets as investors returned from the long Christmas break. This was particularly evident in the FX market, as the dollar corrected sharply higher yesterday to the detriment of European currencies. The tendency of dollar selling and European FX buying that emerged in December was triggered by the dovish pivot at the December FOMC, but seasonal factors also played a role. The dollar tends to underperform at the end of the year, likely due to some tax-related flows from US corporations: DXY weakened in December in each of the past seven years. While the seasonality factor isn’t as strong, January tends to be a good month for the dollar, with DXY having risen on average 0.4% in the past 20 years. February has shown a stronger positive seasonality pattern, with DXY having appreciated in each of the past seven years. The dollar strength in the early part of the year is often associated with the December tax flows by US corporates being reverted, and while expectations of a firmer dollar at the start of the year (which we agree with) could have exacerbated yesterday’s USD buying, the key factor remains Federal Reserve dovish bets against the backdrop of stretched equity valuations after a strong year for US stocks, in particular in the tech sector. We have observed some tentative unwinding of dovish bets as trading resumed: interestingly, the Fed Funds futures curve no longer fully prices in a March cut (21bp at the moment). As trading volumes pick back up this week, US calendar events will also offer direction to investors. Today, the Fed releases the minutes of the December FOMC, which should shed some light on the reasoning behind the dovish revision of the Dot Plot. Given the strong dovish reception by the market after the December Fed announcement, there is a risk of the minutes preventing further dovish bets as some conditionality (in terms of economic data developments) for easing policy emerges in the minutes. Today also sees the release of JOLTS job openings for November and the December ISM manufacturing, and consensus is positioned for a good print in both releases. We are inclined to think that the dollar can hold on to most of yesterday’s gains in the next couple of days, as data may prove benign and investors favour defensive positions ahead of Friday’s US payrolls – which are expected to print a respectable 170k. DXY may hover around the 102 gauge into the payrolls. Beyond the very short term, we still expect a further dollar decline to materialise this year as the deterioration in the economic outlook forces large Fed cuts, but the pace of USD depreciation should be more moderate in 1H24 compared to November/December 2023.  
Rates Spark: Time to Fade the Up-Move in Yields

CEE Market Update: PMIs Reflect Industry Weakness, Focus on Czech Republic's Economic Indicators

ING Economics ING Economics 03.01.2024 14:44
CEE: The market is losing patience with PLN Yesterday's PMIs in the CEE region confirmed continued weakness in industry in December, especially in the Czech Republic where the leading indicator fell to its lowest reading since September last year, sinking hopes of a recovery at the end of the year. The calendar is empty in the region today, but it should get more interesting in the days ahead. On Thursday, the Czech Republic will release the state budget result for last year. The Ministry of Finance is already indicating that the resulting deficit could be lower than projected (CZK295bn), which would be good news for Czech government bonds (CZGBs). At the same time, MinFin is expected to publish a funding plan for this year by the end of this week, the last one in the CEE region, which we believe should also point to a positive picture for CZGBs this year. Then, on Friday, the final 3Q GDP report in the Czech Republic will be published, while in Poland, December inflation will be released. We expect a small increase from 6.6% to 6.7% year-on-year, slightly above market expectations. However, the wide range of estimates suggests an interesting print here. In the FX market, most of the region started the year with gains except the Polish zloty. The general picture for the CEE region seems mixed with a stronger US dollar on the one hand and higher market rates across the board on the other. Although PLN should benefit the most from higher rates across the region in our view, it is the weakest since November last year. Heavy long positioning and just a lazy move down in EUR/PLN in recent weeks seems to have triggered some selling in PLN. Yesterday's paying flow in the rates market seems to have stopped the sell-off around 4.360 EUR/PLN, however, it is hard to say if we are at the end for now. We still expect a stronger PLN given the macro and monetary policy outlook, however for now we will have to experience a moment of weakness. Elsewhere in the region, higher market rates seem to have supported FX and CZK and HUF are enjoying new gains. In Hungary in particular, we could see more in this direction over the coming days, in our view.
The Australian Dollar Faces Challenges Amid Economic Contractions and Fed Rate Cut Speculations

Global Market Overview: Mixed Signals from China and Taiwan, Currency Moves Set Tone for the Week

Ipek Ozkardeskaya Ipek Ozkardeskaya 16.01.2024 12:14
Elsewhere  The People's Bank of China (PBoC) held its policy rate steady this Monday - defying the expectation of a 10bp cut - while pumping more cash into the financial system to reverse the selloff and boost asset prices, and eventually growth. But in vain. The Chinese CSI 300 index barely reacted to the news after China posted a third negative CPI read on a yearly basis. China is still expected to hit its official 5% target this year, but the confidence crisis and the slump in property prices are not going to reverse overnight. Outlook for Chinese equities is not bright.   Taiwan's stock exchange, on the other hand, which diverged positively from the mainland stocks last year, had a cheery start to the week after the ruling DPP's Lai – who is pointed at as a 'separatist' by Beijing - won presidency and his party lost its legislative majority. The latter was seen as a good compromise for relations between China and Taiwan – as the outcome was clearly not over-provocative for Beijing. The Japanese Nikkei 225, on the other hand, hit the 36K mark on the back of a softer yen, and waning expectations that the BoJ will be normalizing at a decent speed this year.   In the FX, the US dollar kicks off the week on a slightly negative note, the AUDUSD struggles to find buyers near the lower bound of its October to now ascending channel, as the PBoC could've been more supportive. The EURUSD couldn't clear the 1.10 resistance last week, and the failure to break above the crucial psychological could weaken the euro bulls' hands this week. Across the Channel, Cable remains cautiously bid after Friday's GDP printed a better-than-expected growth number. The UK will release its latest inflation report on Wednesday. UK inflation is expected to have further eased from 3.9% to 3.8% in December, and core inflation is seen slipping below the 5% mark. A softer-than-expected set of inflation figures could prevent Cable from making a sustainable move above the 1.28 level.   

currency calculator