FX Daily: Staying defensive on EUR and GBP
EUR depreciated 1% to 0.9884. Brent crude oil prices rose a third day by 1.6% to USD93.37 per barrel, its highest level since 14 September. At its meeting in Vienna, OPEC Plus decided to cut oil production by 2 million barrels daily, or 2% of the global oil supply. The announcement was not favourable for the Eurozone. Last month, Eurostat reported double-digit CPI inflation (September: 10% YoY) on the energy crisis and a record-wide trade deficit (July: EUR40.3bn). ECB President Christine Lagarde declined to say if inflation has peaked and acknowledged that rate hikes will be needed at several meetings to curb demand. However, the tightening is coming when Bloomberg consensus expects real GDP growth to flatten to 0% QoQ sa in 3Q22 (vs 0.7-0.8% growth in the previous two quarters) before turning negative in 4Q22 and 1Q23. Against this weak backdrop, we see no reason for EUR to push above parity.
GBP depreciated 1.3% to 1.1326, near Monday’s close. The 10Y Gilt yield is back above 4% after Prime Minister Liz Truss insisted on pushing through with her tax cuts plans at the Conservative party conference. Despite the U-turn on abolishing the 45% top income tax rate, Fitch downgraded UK’s “AA” long-term foreign currency debt rating outlook to negative from stable. Fitch forecasts tax cuts swelling the budget deficit to 7.8% of GDP in 2022 and 8.8% in 2023. Apart from the Chancellor needing to explain how to fund the tax cuts, attention is also turning to how the UK can attract foreign capital to fund a current account deficit that widened to 8.3% of GDP in 1Q22. As more questions arise over UK’s weakened fundamentals, it is probably best to remain defensive on the GBP.
DXY appreciated 1% to 111.21. Dow, S&P 500and Nasdaq fell 0.1%, 0.2% and 0.3% respectively. The US Treasury 10Y yield rose 12 bps to 3.753%, while 2Y rose 5.6 bps to 4.148%. Atlanta Fed President Raphael Bostic believes the US labor market is strong enough for the Fed Funds Rate to peak and pause at 4-4.5% by the end of 2022. However, other Fed officials also see a higher terminal rate of 4.5-4.75%. All agree there will be no rate cut in 2023. The Fed lifted the FFR to 3.25% a fortnight ago. Our chief economist sees a fourth 75 bps hike at the FOMC meeting on 2 November. The ADP Research Institute reported that US companies added 208k jobs in September, more than the 200k expected. It also revised August to 185k from 132k. The employment index in the ISM Services PMI rose a second month above 50 to 53 in September from 50.2 in August. Consensus expects Friday’s nonfarm payrolls to slow to 260k from 315k for the comparable months and sees the unemployment rate unchanged at 3.7%.
Quote of the day
“It is easy to sit up and take notice. What is difficult is getting up and taking action.”
Honore de Balzac
6 October in history
“Gang of Four” arrested in Beijing in 1976.
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