FX Update: JPY and CHF rising to the top on safe haven seeking.

The Bank of England surprises with 15 basis point rate hike – The Bank of England surprised consensus once again by hiking rates 15 basis points to 0.25% and voting 8-1 in favour of the decision, with one dovish dissent (Tenreyro). This surprise came after the market was nearly sure of a rate hike in November that didn’t happen. While sterling rallied hard intraday, EURGBP trades this morning back to where it was before the meeting, while GBPUSD rose above 1.3350 before easing back lower. Perhaps it was the recent November core CPI print reaching 4.0% year-on-year, a multi-decade high, that prompted the decision. The Bank predicts that inflation could peak at around 6% in April. The market is pricing high odds of another 25 basis points of tightening at the next meeting in February. While

ECB meeting offers marginal support for the euro. The ECB inflation forecasts still suggest that inflation will prove temporary, but the size of the upward revision to the 2022 CPI forecast (to 3.2% from 1.7%) was interesting, even if the 2023 and 2024 forecasts were raised only modestly to 1.8% for both years. By raising the nearer term inflation forecast so much, the ECB allows itself the luxury of not having to adjust policy guidance higher if inflation falls back a bit in coming months and allows it to look more credible if inflation does persist longer than expected, which will allow it a more hawkish adjustment down the line to future inflation forecasts if necessary. Regarding the ECB QE programme, the PEPP of emergency pandemic-inspired QE purchases will roll off in March, but ECB President Lagarde said there would be no “brutal transition” to lower QE as the bank is set to continue purchasing EUR 40 billion/month for three months (versus around EUR 70 billion now), then EUR 30 billion for three additional months before reverting to the EUR 20 billion that was in place before the pandemic outbreak.  President Lagarde said it was unlikely that the ECB would hike rates in 2022. 

The Turkish central bank cut interest rate as expected and despite cratering lira but signaled the end of cutting cycle. The Turkish central bank lowered the policy rate 100 basis points to 14% as expected, even after TRY had lost more than another 10% in the few sessions before the meeting. The central bank committee said that this would be the final cut for now, but signaling from Turkey’s president Erdogan will be more critical from here, as the central bank is under his political sway as he has cast the lira devaluation (and fight against the high rates needed to shore up confidence in the lira) as a fight against foreign speculative interests and that lower rates are a boon to the economy. Wrong. Yesterday, Turkey announced a 50% increase in the minimum wage, risking a wage-price spiral. As of this writing, the lira had lost some 9% against the US dollar from yesterday’s close before a large rebound from above 17.00 in USDTRY.

Table: FX Board of G10 and CNH trend evolution and strength
More churn since yesterday as much of what we saw was a sharp move that was counter to the prior session – need fish swimming in the same direction for a while to see trend readings solidifying, but do note the loss of altitude from CNH – probably one of the most solid developments to hang our hats on for some time from here after recent policy signals out of China.

Table: FX Board Trend Scoreboard for individual pairs.
Some of the JPY crosses that were trying to flip positive have now stumbled, but it is finely balanced in for example EURJPY and AUDJPY, both of which I would expect to move lower if risk off extends here. Note USDCNH trying to flip positive on the trend today on a close higher – this one could stick for some time, with CNHJPY joining the action and XAUCNH doing likewise, with EURCNH close to flipping higher as well.

Upcoming Economic Calendar Highlights (all times GMT)

• 1330 – Canada Nov. Teranet/National Bank Home Price Index
• 1800 – US Fed’s Waller (FOMC voter) to discuss US economic outlook