FX Update: Euro down on PMI miss. USD resurgent.

Today's Saxo Market Call podcast

FX Trading focus:

• Norges Bank and Bank of England larger than consensus 50-bp hikes do nothing for
• Weak Euro on preliminary June PMI today
• USD resurgent, AUDUSD on verge of full-blown reversal

Norges Bank hikes 50, initial rally reverses
The Norges Bank hiked 50 basis points, which only a large minority expected, triggering a knee-jerk rally in NOK, if one that entirely failed to sustain by the end of the day. This shows that rate moves are a marginal consideration for NOK at best. By later in the day yesterday, a steep sell-off in crude oil and European gas benchmarks weighed on the currency, even as short Norwegian rates stuck a move higher on the day. Weak risk sentiment in Asia overnight and ugly European PMI’s this morning (more below) weighed further on NOK, even taking EURNOK to a local new high even as the euro came under intense pressure versus the US dollar. USDNOK rocketed back above 10.80 after touching 10.50 for a heart-beat yesterday and is at risk of entirely reversing the attempt to establish a down-trend after retreating from the high just shy of 11.30, posted at the end of May.

Bank of England hikes 50, GBP shrugs
The Bank of England went with a larger hike than the consensus expected, taking the policy rate 0.50% higher to 5.00%. The market marked up the peak BoE rate to above 6.00% early next year, but Gilt yields hardly reacted beyond the 1-year time horizon, with the peak at the very front-end of the curve only marked several basis points higher. This kept EURGBP relatively sideways, with GBPUSD moves less about the BoE and more about the US dollar. Discussions of the incoming UK mortgage resets for 2-year debt from Q3 extending a year forward remind us of the painful incoming impact on household disposable income in the UK. Some 800,000 households face a mortgage reset on 2-year mortgage debt that will be on the order of 500 basis points and another 1.6 million will reset next year, according to a Reuters article. The burden falls heaviest, of course, on younger borrowers who have the highest loan to equity ratios. If widespread default develops as a risk, can only imagine that the government drums up a rescue plan before it allows widespread evictions, but that is getting ahead of ourselves. For now, this event just shows that the market has largely priced about as much as it can for BoE action at coming meetings and continues to fret the eventual fallout to the economy as seen in the ongoing inverting of the UK yield curve.

Chart: AUDUSD
Weak narrative around China’s outlook, a dovish set of RBA minutes after two hawkish surprises that had recently pumped up Australian rates and the recent setback in risk sentiment (particularly in Asia) had the AUDUSD on the defensive this week. The sell-off has taken the pair into critical levels, even below the 200-day moving average here intraday today. This is beginning to look like a full reversal of the rally wave from the early June lows, especially now that we find ourselves more than a figure below the original 0.6800 breakout area to the upside. The coming few sessions should tell us whether the pair can dig itself out of the hole or if we are headed for a full capitulation back to the sub-0.6500 lows of earlier this month. Without a brightening outlook in China-centered sentiment and possibly the CNH, the downside remains the side of least resistance.