Wednesday, 7 September 2022
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•          Try and stop the dollar. The greenback remains in absolute pole position against peers. Yesterday was no different. The trade-weighted DXY surpassed the 110 barrier for the first time since 2002. EUR/USD closed at a new two-decade low just north of 0.99 but went as low as 0.9864 intraday. Sterling’s relief rally didn’t last long. EUR/GBP finished close to 0.86 while GBP/USD’s escape from the 1.15 barrier failed miserably. Yet, the most spectacular move was seen in USD/JPY (142.80) with the combo surging more than 1.5% beyond 141, 142 and briefly even 143. The reason for this dollar madness: the ongoing vulnerable risk sentiment and surging US rates. At their first trading day of the week, US yields had some catching up to do with European rates, which shot up on Monday. The move higher gained a lot of traction at the US open and received another boost from an unexpected rise in the US services ISM (from 56.7 to 56.9). Curve changes ranged between 11.6 bps (2y) and 15.8 bps (5y, 10y). This compared to the 4.3 bps tops for European swap yields. UK yields boomed almost 21 bps at the very long end. Both in Europe and the UK the short end outperformed (yields flat). Markets put some comfort from the new UK PM’s plans as well as rolling headlines in Europe going into Friday’s energy meeting that suggested action regarding the high energy costs.

•          There’s no hiding for king dollar in Asia either. USD/JPY soars once again to close to 144, practically smelling the 1998 147.66 resistance level. It sparked another round of verbal interventions by government officials including Chief Cabinet Secretary Matsuno and Finance Minister Suzuki. In vain, clearly. Acting in opposite way, the BoJ steps up bond buying at its regular operations because of the Japanese 10y yield is nearing the upper limit of the tolerance range again. South Korea is becoming vocal on the weak won too. The finance ministry will hold an FX meeting with bankers later today. USD/CNY steams ahead as well, to 6.97 despite the PBOC setting the reference rate with the strongest bias (deviation from average estimate) on record (cf. infra).

•          We’ll be watching BoE governor Bailey’s testimony to parliament and the Fed’s Beige Book today. We think the downside in core bond yields is limited going into tomorrow’s ECB meeting – for which a 75 bps rate hike is now the bar. Inflation is talk of town and central banks have no option but to keep frontloading. Both the European 2y swap and US 2y yield are attacking recent cycle highs around 2.2% and 3.5% respectively. Longer tenors (eg 10y) are closing in on previous highs. We remain cautious about the euro and dollar bullish on currency markets. EUR/USD this morning is again at risk losing the 0.99 barrier.

News Headlines

•          Foreign trade data are notoriously volatile and often provide mixed signals. Even so, August Chinese foreign trade data suggest further headwinds for the economy. Exports in USD terms (7.1 Y/Y vs 18.0 Y/Y in July) and imports (0.3% Y/Y from 2.3% Y/Y) both slowed sharply and missed expectations by a big margin. The trade surplus also declines much more than expected from $101.26 bln to $79.39 bln. The data suggest that both foreign and domestic demand are slowing down. Considering broad inflationary pressures, the performance in real terms probably is even worse. For now, the weakening trend of the yuan doesn’t help to support the poor international trade performance. In this respect, the yuan this morning weakened further to near the USD/CNY 6.98 level, even as the PBOC set the daily fixing with the strongest bias on record, a clear signal they want to prevent further yuan weakness. CNH already traded north of USD/CNH 6.99.

•          Q2 growth data in Australia reported this morning printed close to expectations at 0.9% Q/Q and 3.6% Y/Y (was 0.7% Q/Q and 3.3% Y/Y in Q1). Growth was mainly driven by private consumption (2.2% Q/Q), especially demand for services as the economy reopened. Net exports also contributed positively as exports growth (5.5%) outpaced imports (0.7%). Inventories subtracted 1.2 ppts of the overall growth figure. The report had little direct impact on the Aussie dollar. The Australian currencies also suffers from broad USD strength and tested the AUD/USD 0.67 area this morning, nearing the 0.6682 YTD low.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway. A 75 bps hike is on the table at the September meeting. Germany’s 10-yr yield broke out of the corrective downward trend channel mid-August. Forceful return action higher since then met some resistance around the 1.50%/1.65% zone.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hits max speed in September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments at Jackson Hole and the simultaneous sell-off in bonds & equities pushed the euro to new lows below parity. This year’s downward trend channel and systematic failure to leave YtD lows behind suggest more downside.

The Bank of England hiked by 50 bps in august. More hikes are coming but are priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP broke out of the corrective downward trend channel since mid-June but is running into resistance in the high 0.86 area. Meanwhile, the new UK PM Truss announced power purchasing measures that may limit sterling’s downside in the short run.

Calendar & Table

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This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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