Monday, 21 November 2022
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•          Boston Fed Collins joined the growing chorus of Fed officials trying to reshape market expectations. She said rates need to rise further and even kept the possibility of a 75 bps move on the table. But just as others did, she puts the focus on how high rates ultimately need to be instead of the pace. Her comments helped the dollar to recoup some of the losses endured earlier in the week. Meanwhile, voluntary TLTRO repayments at the ECB were about half of the €600bn estimations, sucking up only a marginal proportion of euro excess liquidity. EUR/USD finished at 1.0325, closing the week below the important 1.035 resistance which was being tested a few times in the days before. The weekly graph now displays a doji pattern, indicating potential further losses ahead. The trade-weighted dollar formed a bullish weekly hammer. Core bonds traded mixed with US Treasuries hugely underperforming Bunds. The US yield curve inverted further with changes between 5.2 bps and 8.3 bps on the account of real yields. German yields’ early attempt to rise soon went into reverse, ending up flat to 1.8 bps lower at the front. UK gilts extended losses following UK finance minister Hunt’s Autumn Statement. Yields rose 3.5 bps (30y) to 6.3 bps (2y). Sterling is given the benefit of the doubt, gaining against the euro (EUR/GBP closed at 0.868) and marginally vs the dollar (GBP/USD closed at 1.189). Risky assets including equities finished 1.20% higher in Europe (EuroStoxx50) and up to 0.6% in the US (Dow Jones). But the likes of oil had an off day. Brent at some point lost about 4.5% before paring some losses. Closing at $87.62/b still meant a weekly loss of 8.7%.
•          Covid cases in China/Hong Kong are on the rise again and “test” cities that had relatively mild Covid restrictions despite high case numbers saw measures tightened over the weekend, dampening reopening hopes. The story is setting the mood during Asian dealings this morning. Stock sentiment is grim. China and Hong Kong underperform with losses of 2% and more. The dollar thrives in such an environment. USD/CNY advances to 7.16. EUR/USD dips towards 1.027. Core bonds gain.
•          The economic calendar won’t inspire a lot today. EMU consumer confidence (tomorrow), European PMI’s and the FOMC meeting minutes (both on Wednesday) and central bank policy meetings in Hungary, Sweden and New Zealand will spice the agenda later though. The slew of ECB speakers (Nagel, Holzmann and others) scheduled for today are a wildcard to trading. The US kicks off its end-of-month refinancing operation in a holiday-shortened week (Thanksgiving Nov 24) with both a $24bn 2-y and a $43bn 5-y auction. This could trigger some UST underperformance in a daily perspective. On the FX front, we look out for the dollar to effectively confirm last week’s doji/hammer formation.

News Headlines

•          The UK Sunday Times reported that senior government officials were exploring a pathway to closer economic ties with the EU under a Swiss-style arrangement over the next decade. The UK government immediately pushed back against the idea with PM Sunak able to address the issue this morning when he’ll deliver a speech at the Confederation of British Industry’s yearly conference. The Swiss-style deal includes several red lines for hardline brexiteers in the tory party, including payments to the budget, EU market regulation and free movement of labor.
•          Rating agency Fitch affirmed the Italian credit rating at BBB with a stable outlook. Factors that could, individually or collectively, lead to negative rating action/downgrade are debt sustainability concerns for example in case of expenditure pressures, a more severe macroeconomic shock due to energy rationing or other spillovers from the war in Ukraine and a disorderly tightening of financing conditions outside the scope of the ECB’s Transmission Protection Instrument. Italy has a similar BBB (stable) rating at S&P while Moody’s uses a weaker Baa3-rating with a negative outlook.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below-consensus CPI print strengthened some Fed members call to slow down the tightening pace, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests more downside potential.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. EUR/USD left the strong downward trend channel since February. The pair tested resistance around 1.0341/50/68 but failed to push through. A weekly doji pattern arose, suggesting potential losses further ahead.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

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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