CNY bounce weakens USD, Riksbank boosts SEK

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.

Chart: USDCNH
(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.