Chief Macro Strategist
Summary: A cavalcade of central banks on tap this week, with Sweden’s Riksbank on tap tomorrow and seen hiking 75 basis points. It seems only 100 basis points or particularly hawkish guidance can impress the market at this point, however, as EURSEK trades near the top of the range. The highlight of the week will be Wednesday’s FOMC meeting, but there are interesting sub-plots afoot at the raft of meetings set for Thursday, including the Bank of Japan and Bank of England.
FX Trading focus: A cavalcade of central bank meetings this week. Can only 100 bp moves impress?
The cavalcade of central banks this week includes no fewer than six of the G10 currencies, starting with the Riksbank tomorrow and followed by the FOMC meeting on Wednesday and then the Bank of Japan, Swiss National Bank, Norges Bank and Bank of England on Thursday. Each of these has an interesting sub-plot, but for the moment, 75 basis points is the new basic increment of rate hikes it seems, with the Riksbank, Fed, Swiss National Bank all set to deliver a hike of this size, according to expectations, with probabilities edging beyond a hike of that size in many cases.
The Bank of England is supposedly expected to hike merely 50 basis points on Thursday, but some leaning for a 75-basis point move. The latter makes more sense as sterling has traded over the last week at 37-year lows versus the US dollar and at cycle lows versus the Euro and 75 basis points moves are the new norm nearly everywhere. The only logic pointing to the smaller 50 basis point move could be the hope that inflation expectations will remain more anchored due to the new government’s plan to cap consumer gas prices this fall and winter. Still, capping prices will keep demand more elevated than it would have been otherwise and wear on UK fiscal an external deficits, so the transmission has to happen somewhere. Bailey and company have been tough to call, but surely the BoE goes 75?
More thoughts on the FOMC meeting in tomorrow’s FX Update.
Chart: EURSEK
The Riksbank is priced fairly solidly at 75 basis points, with a minority looking for a 100 basis point move, for example, meaning that a “mere” 75 basis point move tomorrow could see EURSEK jumping to new highs above the former range to 10.80, given that it is trading at the top of the range even with the current pricing of what the Riksbank will deliver. the recent general risk sentiment nosedive has as much to do with EURSEK trading here as any shift in Riksbank anticipation. Meanwhile, the new government formation process may take some time, given the very slim majority the right-leaning parties won in the election (176 for the bloc versus 173 for the left bloc) and the novelty of working with the former right populist, and former pariah party, the Sweden Democrats won’t make the process easier. A 75 basis point move and EURSEK may shoot to 11.00 if global equities continue to trade weakly here. A 100 basis point move may only buy some temporary SEK upside/EURSEK downside if risk sentiment remains on the defensive post-FOMC on Wednesday.
The euro has remained quite resilient as the ECB has gone a long way to buying back some credibility with its recent 75 basis point hike and anticipation of another 75 basis point hike in October and then most of another hike of that size in December. Still, the path to quantitative tightening remains a tricky one for the ECB, given its need to ensure orderly spreads. Elsewhere, the softening natural gas prices of the last week and Ukrainian successes on the battlefield have brought the Euro some relief as well, as has weak risk sentiment, which supports the more liquid euro in the crosses as EURGBP jumped above its former long-term range and EURSEK and other euro crosses have also been bid. EURUSD has remained very sticky around parity – big relative test that should help resolve the broader USD direction post FOMC on Wednesday.
The euro has remained quite resilient as the ECB has gone a long way to buying back some credibility with its recent 75 basis point hike and anticipation of another 75 basis point hike in October and then most of another hike of that size in December. Still, the path to quantitative tightening remains a tricky one for the ECB, given its need to ensure orderly spreads. Elsewhere, the softening natural gas prices of the last week and Ukrainian successes on the battlefield have brought the Euro some relief as well, as has weak risk sentiment, which supports the more liquid euro in the crosses as EURGBP jumped above its former long-term range and EURSEK and other euro crosses have also been bid. EURUSD has remained very sticky around parity – big relative test that should help resolve the broader USD direction post FOMC on Wednesday.
Table: FX Board of G10 and CNH trend evolution and strength.
The Euro has been keeping up with the US doll of late, as has the JPY for over a week, with the focus on the weak side on the less liquid currencies and sterling. The CNH direction now that USDCNH has achieved 7.00 remains important – still no broad signal there despite the USDCNH technical focus.
Table: FX Board Trend Scoreboard for individual pairs.
The AUDNZD up-trend remains credible at the top of the range, but the bulls need to make a break for it. Elsewhere, I am unwilling to get on board with the rising number of JPY crosses flipping into a negative trend until I see what US treasury yields to on the other side of the FOMC meeting on Wednesday, and possibly the Bank of Japan just some hours later.
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