Freshly minted UK Prime Minister Truss used her first day in office to launch a £130 billion package to cap energy bills at their current level in order to avoid the cost-of-living crisis for many had bills risen as scheduled to nearly double the current levels next month. The cost estimate is spread over 18 months and represents some 5% of UK GDP now, (likely considerably less next year, given the runaway nominal growth in the UK economy at present). Sterling has seen a solid relief rally on hopes for Trussonomics, which will include tax cuts and a possible threat to Bank of England independence. Longer term efforts to increase investment in new energy sources could pay long term dividends, but the UK and its currency can ill-afford aggravating already yawning deficits in the near term, and further Bank of England rate hikes will aggravate risks to growth/real estate while piling onto the stark mathematics of future deficits and sovereign cost-of-debt-service calculations. Still, it is a riveting effort to watch as Truss and her strong Conservative majority can show more dynamism and force in policy making than we are going to get in the near to medium term from the US or Europe.
Australia’s RBA hiked 50 basis points as almost universally expected and claimed in its statement that it is on “no preset course”. The front-end of the Australian yield curve hardly budged on the news after some intraday volatility as the market expects higher odds that the RBA downshifts at tone of the coming two meetings to a 25-bp hike. RBA Governor Lowe is set to speak on Thursday, an event that could provide a stronger bias than the neutrality we saw last night.
Note fairly strong new highs in USDCNH today above the cycle high and within reach of the psychological 7.00 level now (7.20 area nearly touched in 2019 and 2020 the cycle focus and the CNY hasn’t shown much independence of movement in the crosses.)
Table: FX Board of G10 and CNH trend evolution and strength.
Sterling trying to make a comeback in momentum terms, but is only about halfway to notable resistance in the key EURGBP and GBPUSD pairs. Elsewhere, not the recent CNH downside momentum and Aussie following suit to a degree, while the JPY takes the crown for most negatively trending currency in our universe.