Head of FX Strategy
The CNY bounce on intervention has made surprisingly modest waves across EM, though it has weakened the USD. Elsewhere, SEK is sharply stronger after the Swedish Riksbank surprised on the hawkish side for once and the US is on holiday to celebrate Independence Day.
The CNY bounce on rhetorical intervention, and apparently state bank flow driven intervention, gave a brief boost to global risk appetite yesterday and a handful of EM’s rallied modestly in response, though the action in the Asian EM’s was surprisingly muted, given the strength of the signal and the intraday volatility. Rather, the USD itself seems to have borne the brunt of the move and the greenback a few notches, particularly against the smaller G-10 currencies. One of the latter was the Swedish krona, which ripped stronger on the Riksbank meeting.
There was a virtually nonexistent bar for the Riksbank to clear in surprising on the “hawkish” side as the bank’s statement merely noted that the exchange rate was weaker than the bank expected and that they expected it to slowly strengthen.
The lifting of inflation forecasts was perhaps the key signal (even if they did so in a rather odd way, boosting the core inflation forecast to 2.1% for both 2018 and 2019 versus 1.9% for both at the previous forecast round, but actually lowering the 2020 forecast to 1.9% vs. 2.0% previously. The GDP forecasts were shaded slightly lower and the unemployment rate forecast was also lowered 0.1% for 2018 and 2019.
The policy rate forecast was unchanged as the bank expects to begin hiking rates later this year, a slightly hawkish contrast to the European Central Bank’s keeping its foot on the gas until next summer. A couple of dissenting voices indicated restive hawks, one who wanted to hike now and another who wanted to hike sooner than indicated in the statement. Many expected the bank to drop its commitment to retaining the policy option of intervening in the currency, but this was instead maintained, a slightly dovish surprise on that front. Regardless, the krona blasted stronger from a key resistance area on the EURSEK and could continue to look lower – possibly all the way to 10.00 if the 10.24 area swing level can be taken out.
Today may prove a lackluster session, given the US is closed for the Independence Day holiday, although the recent CNY volatility has injected considerable energy into this market and could drive action elsewhere. The next tactical capitulation levels for USD longs are not far away ahead of the FOMC minutes tomorrow and the US employment data Friday.
(USDCNH is the offshore yuan exchange rate and the spread to USDCNY has been somewhat larger than normal over the recent volatility). The USDCNY move back lower has picked up a bit more pace today, but the authorities there are likely merely interested in capping the action more than sending the currency back to the lows for the cycle. One of the more interesting ideas circulating is that China’s allowing the recent CNY weakening was aimed more at the US Fed and its rate hike regime rather more than at Trump and the threat of a trade war, as China needs loosening rather than tightening. If that is the case, it will be interesting to see how China deals with the challenge to its exchange rate policy from further USD strength from here, should the greenback get back on the rally track.
The G-10 rundown
USD – the greenback is under some pressure against riskier currencies from the chunky consolidation in USDCNY, but not sufficiently so yet to suggest a full reversal - next status check on Friday after the FOMC minutes and US data.
EUR – stories abound that the ECB will look to do a version of “Operation Twist” X to adjust its balance sheet in favour of long dated government bonds to keep long yields suppressed even after the end of QE. This is only a decided euro negative if US rates pick back up again.
JPY – the yen looking up as long as risk appetite wobbly and global bond yields fall, though higher oil prices are a modest negative from a current account surplus perspective for Japan.
GBP – sterling is getting ambitious this morning locally as EURGBP once again shows an inability to build anything resembling a trend after the recent break of resistance. Next week could see more focus on Brexit after this weekend’s closed door conservative party top summit aiming to cobble together a united front on its negotiating position.
CHF - EURCHF has gone quiet as traders perhaps find it difficult to work up any anticipation about yield spread widening when ECB has so thoroughly weighed in on forward guidance and may continue to suppress longer yields with its own “Operation Twist”.
AUD – AUDUSD backing up on the strong 53.9 Caixin June Service sPMI reading from overnight and on the powerful CNY rally. But the downtrend is well established and it would take a significant backup through perhaps 0.7500 to unsettle the bears.
CAD – USDCAD is working into a pivotal zone between the old high near 1.3125 and the 1.3000 level ahead of the Bank of Canada meeting next week as CAD strength has been driven by rising odds of a hike at that meeting and the strong surge in oil prices – particularly the WTI crude benchmark used for much of North America.
NZD – the kiwi is bouncing in sympathy with the CNY against the USD and AUDNZD trying to second guess the break above the 1.0960 area – we prefer an eventual follow up move higher there.
SEK – there is plenty of range to work with to the downside ahead of the pivotal 10.00 level and likely heavy positioning fuel to drive a bit of further SEK strength as it has been a popular short.
NOK – sluggish NOK here suggests perhaps NOKSEK long squaring is holding back EURNOK from a larger fall.
Upcoming Economic Calendar Highlights (all times GMT)
0715-0800 – Euro Zone Final Jun. Services PMI
0830 – UK Jun. Services PMI
US Markets Closed for Independence Day Holiday