Head of FX Strategy
Summary: Sterling was the notable mover among currencies yesterday as it fell after Bank of England rhetoric was read as dovish relative to forward expectations. Elsewhere we saw some notable US dollar strength yesterday, but some of this has reversed in today’s trade, with US yields frozen in a tight range all along the US yield curve awaiting incoming data.
FX Trading focus:
Sterling suffered a chunky sell-off on a couple of comments from Bank of England speakers at the ECB forum in Sintra, Portugal yesterday. Even as he bemoaned the causes for the Bank of England under-estimating the inflation risks in its prior forecasts, Chief Economist Huw Pill noted that he was seeing signs of transmission of BoE policy into private rents. The comment suggests that as long as tightening is seen as having some effect, the Bank of England may soft-pedal its approach, particularly when Governor Bailey later chimed in that he expects headline inflation will fall back sharply by the end of this year. There were other comments on second round effects and Bailey questioned market assumptions that a peak would so soon lead to cutting. These sounded none to dovish, and yet UK rates corrected quite sharply at the front-end of the UK yield curve, taking sterling south as well. EURGBP rose above 0.8640 at one point and GBPUSD dropped well through the sub-1.2700 supports to trade closer to 1.2600 at one point before rebounding.
The US dollar was also firm, broadly speaking, but this was not down to any input from data or US treasury yields, which remain remarkably frozen within tight ranges all along the curve. As we discussed in today’s podcast and recently in this column (as of this writing, we have been unable to upload it due to a technical issue with our host – go to https://saxostrats.podbean.com to see if we finally succeeded), to inject some more volatility into this market we need to either see a strong tilt to the worse in the outlook that sparks volatility from a risk sentiment angle or enough ongoing strength in the data to spark a break higher in long term yields – something that would take the US 10-year yield benchmark, for example, north of 4.0% again.
Chart: EURUSD
While Bank of England speakers at the ECB forum in Sintra, Portugal managed to move the UK rates needle, the ECB’s Lagarde and Fed Chair Powell failed to do likewise for EU or US rates, clearly an indication that the two central banks there are in data watching mode. EURUSD has chopped around sufficiently to mislead both bears and bulls over the last couple of session, arguing for patience and further signals from a confluence of factors (new incoming data, something that sparks volatility in US long yields, etc. as noted above). Until then, the key levels are fairly well etched now, with 1.1000 on a daily close a minimum hurdle for favouring a possible renewal of the uptrend that has stalled since early May and a close below 1.0850 and perhaps even 1.0800 to point lower for a test of the 1.0635 pivot low. The next best chance for incoming data to dislodge EURUSD from this limbo area are the weekly US jobless claims up today and then the flash June Eurozone core inflation data tomorrow, with the US also reporting May PCE Inflation data.
The Riksbank met today and decided on the 25-bp hike that the vast majority of observers expected (some thought Riksbank might do like the BoE and Norges bank and re-accelerate their hiking regime.) In the forward guidance, the Riksbank said it would hike again “at least one more time” this year. It also guided for a faster pace of QT, as it is set to sell SEK 5 billion per month of Swedish government bonds from a pace of 3.5B/month previously. It claimed that the faster pace would help strengthen SEK. The inflation forecasts were kept almost unchanged at 2.4% for next year and 1.8% in 2025 even with some language in the statement fretting how high inflation got and frustration that the pace of its fall has proven slower than anticipated. EURSEK chopped back and forth in the wake of the announcement, briefly posting a new all-time high, but little changed on the day as of this writing.
Table: FX Board of G10 and CNH trend evolution and strength.
The pace of the JPY’s descent has slowed on sovereign yields generally going nowhere. The US dollar is trying to poke to the strong side, but is not generally trending higher just yet in a broad sense. The kiwi has suffered the strongest momentum change over the last couple of trading sessions, probably mostly on a reversal of the over-extended recent AUDNZD sell-off.
Table: FX Board Trend Scoreboard for individual pairs.
USD pairs are not showing a consistent picture, as AUDUSD and NZDUSD weakness are more likely due to the gravitational pull of a weak CNH. Note that GBPUSD is getting closer to suffering a reversal. EURJPY features the most extreme trend reading of 9.1, quite remarkable given flat European sovereign yields of the last couple of weeks. Finally, watching out for a bullish reversal confirmation in AUDNZD in coming sessions and whether EURGBP upside develops further after testing resistance.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
