Monetary policy tightening cycles are close to their peak in the G10 space, although this week should see a 25bp hike in the UK and possibly Australia too. Policy changes are more advanced in parts of the EM world, where Chile cut rates 100bp on Friday and Brazil should start easing this week too. However, low volatility looks set to remain a key driver of FX
USD: Overnight rates at 5.30% make the dollar an expensive sell
The dollar is proving quite resilient. Overnight USD rates at 5.30% are probably playing a role here. Also, evidence of a ‘Goldilocks’ scenario in the US is helping too, where there are further signs of disinflation even though US consumption is holding up quite well. This compares to Europe and China where business surveys remain soft and the concern is that stagnation deteriorates into contraction.
Testing the US soft-landing thesis this week will be the release of ISM surveys and Friday’s nonfarm jobs report. Later today we will also see the Federal Reserve’s Senior Loan Officer Survey, where we’ll receive insights on lending volumes and how much credit conditions have tightened. Recall that the equivalent survey from the European Central Bank last week undermined the euro.
Some last vestiges of tightening cycles in G10 economies can be offset against developments in emerging markets. Here, Latin America saw some of the earliest and most aggressive tightening cycles during the pandemic and, on Friday, Chile kicked off easing cycles with a 100bp rate cut. Money markets seem to imply expectations of a 700bp rate cut over the next 12 months. And Brazil is expected to start easing on Wednesday with a 25bp cut. In theory, this should be good for emerging market growth prospects (and EM portfolio flows) and a slight dollar negative. The risk, however, is that rates are cut too far too fast – let’s see. Also, look out today at 0900CET for any new measures from China’s State Council to boost consumption (and EM growth prospects).
Despite this diverging global growth and monetary policy story, cross-market volatility remains low – perhaps as investors are now expecting prolonged pauses in core interest rate markets. This remains a negative for the Japanese yen and a positive for the high yielders including the Mexican peso and the Hungarian forint. The dollar is probably trapped somewhere in the middle here and unless we see some sharp deterioration in US activity that would favour the Fed not just pausing, but easing – the dollar can probably trade out ranges over coming weeks. DXY to trade 101.00-102.00 near term.
Chris Turner
EUR: Should we expect a growth surprise in 2Q
Comments over the weekend from ECB President Christine Lagarde that 2Q GDP releases so far have been encouraging suggest that the ECB may not be ready to abandon seemingly over-optimistic growth forecasts. Today we will have the first look at 2Q23 eurozone GDP growth data – expected at 0.2% quarter-on-quarter. A little later, flash July CPI will be released and is expected to show some further slowing in both the headline and core readings. Expectations for the ECB deposit rate at year-end have dipped from 3.95% to around 3.83% now.
We are a little disappointed that EUR/USD did not hold gains on Friday’s soft US Employment Cost Index reading. As above, that may suggest US disinflation is not enough to get the dollar lower. Unless we see some downside surprises to the US activity data this week it looks as though EUR/USD can be dragged back towards the 1.0920 area.
Chris Turner
NOK: Look out for FX purchases today
At 1000CET today, Norges Bank announces its daily FX purchases for the month of August. We had felt in the past that these were contributing to the krone’s underperformance. These had been cut back from NOK1.1mn to NOK1mn between June and July. Given oil prices are doing well and that the trade-weighted krone has rallied 4.5% this month, presumably we should not see these purchases cut much further. But the market might take any increase in the FX purchase as a mild krone negative.
Chris Turner
CEE: Polish inflation one step closer to single-digit territory
After two light weeks and a strong global story, attention returns to the region. Today sees the release of July inflation in Poland and 2Q GDP numbers in the Czech Republic. In Poland, we expect inflation to have fallen again from 11.5% to 10.9% year-on-year, slightly below market expectations. As we move closer to single-digit territory, which may warrant the first rate cut, we think the market will be watching closely to see if we get below 11% today….
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