FX Trading focus: EURUSD parity back in view even as market raises ECB expectations. CHF gets respect.
Rising EU yields and even ECB rate expectations aren’t worth much as long as gas/power prices in Europe continue to spiral out of control, at multiples of what US industry is paying for its gas and power supplies, continuing to drive a worsening current account imbalance made additionally unattractive by extremely negative real rates. As we kick of another week, we now have another shutdown of Russian gas deliveries through the Nord Stream 1 pipeline, said to be for a few days of maintenance. This has spiked forward natural gas and power prices to even more absurd levels than the already dire levels of late. An observer on Twitter, one @LionHirth claimed this morning that “German industry has stopped buying power and gas forward…either prices will fall, firms say, or they’ll stop producing.”. At least some rain upstream has helped raise most of the trouble spots on the Rhine considerably, which will aid deliver of coal and diesel to power plants, but Europe remains under extreme pressure and EURUSD is under renewed pressure as well, with parity unlikely to hold like it did in July as discussed in the chart below.
The USD has been strongly bid since last Thursday as last week saw the market continuing to slowly push out its view of the timing of peak Fed rates as well as when Powell and company will eventually shift to an easing stance. The degree to which Fed Chair Powell succeeds in continuing to drive a repricing of the Fed forward curve to the upside will be an important factor for the greenback this week, as will the direction of longer US treasury yields after Friday saw a more determined jump higher in yields at the long end of the curve, with the 10-year benchmark touching 3.00% overnight.
We continue to keep USDCNH on the radar on the risk of a firmer upside break than what we have seen thus far. Overnight, the PBOC eased the 1-year rate a mere 5 basis points versus the 10 basis points expected, but eased the 5-year rate by 15 basis points, a move seen as throwing the beleaguered Chinese property market a bone. Yes, USDCNH has traded to new highs well above 6.84, but given the scale of USD strength elsewhere, this so far remains more about China moving to prevent the yuan from tracking aggravated USD strength rather than showing signs of desiring a broader weakening.
EURUSD has slipped back to parity and a bit worse this morning. It’s a symbolic level that may have a hard time holding this time around as long as the EU continues to wind its way to an incoming recession with no relief in sight on the power/natural gas emergency. Flash August PMI’s are up tomorrow morning for France, Germany and the Eurozone after the July survey showed German slipping into slight contraction in both manufacturing and services, France was still seeing an expanding services sector but slightest contraction in manufacturing, and the Eurozone-wide survey was near the 50 market for both numbers. A fresh sell-off could target 0.9500 next.