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We expect the Czech National Bank to remain on hold next Thursday for the same reason it held rates steady in February: an uncertain global environment. The CNB board is likely to wait for a new forecast in May before any policy reaction. This should outweigh the weaker-than-expected Czech koruna and higher core CPI
Our economists expect he CBR to remain on hold today. Feb inflation of 5.2% YoY (and most likely 5.4-5.5% YoY in March) is comfortably within the central bank's ‘line in the sand' of 6%, economic activity remains subdued and markets conditions haven't really deteriorated since the previous meeting. Equally, the downward rate cycle seems remote as the gasoline price freeze expires at the end of March, leaving the mid-term CPI trend uncertain, while finally mid-term market uncertainties related to global and Russia-focused risk-appetite haven't evaporated. With the no change from the CBR widely ...
As all of the main inflation indicators are now above the inflation target, the NBH has reached the point of no return: the tightening will be on from March. However, we see rather a dovish hike from the NBH with a lack of pre-commitment. Coupled with aggressive market pricing for 2020/21, we favour 1s3s HUF IRS flattener.
We expect the CNB to stay on hold on Thursday for the same reason as in February – the uncertain global environment. The CNB board is likely to wait for a new QIR forecast in May before any policy reaction. This should outweigh the currently weaker-than-expected CZK and higher core CPI. We see scope for a “dovish” hike in May. We like 1x4 vs 3x6 CZK FRA steepener. CZK IRS curve to remain inverted.
We are closing our short EUR/HUF recommendation initiated on 16 January via 12-m forward for a profit of 2.62% (entry EUR/HUF 324.20 via 12m forward, exit EUR/HUF 315.70, spot ref EUR/HUF 313.97). As per EM FX & Rates Trader: 1s3s HUF IRS flattener (published this Tuesday), we believe the NBH will deliver cautious and gradual policy normalization next week and is unlikely to surprise the market on the hawkish side.
The Fed delivered a meaningful dovish surprise yesterday, taking both hikes off the 2019 projections, and reducing the pace of quantitative tightening from May (from USD30bn to USD15bn per month) with QT to end this Sep. Like the ECB, the Fed surprised on the dovish side but, unlike the ECB, the downward revision to growth projections was limited. This should reduce market concerns on the global economic outlook and put more emphasis on the Fed's (risk supportive) loose monetary stance. With the Fed unlikely to hike in this cycle (see FOMC Review) and the US twin deficit in place, USD now lac...
The Russian Rouble has been the best performing EM currency this year, buoyed by: i) a benign external environment, ii) high yields, iii) seasonal strength in the current account surplus and iv) large RUB tax payments in March. However, the balance of payments position should make RUB vulnerable over the next six months and we forecast USD/RUB returning to 67 over this period. We now think it is a good time to hedge long RUB exposure and evaluate a range of FX option hedging strategies as an alternative to expensive hedging in the RUB forwards market.
The lack of volatility in the FX markets means it's going to be local stories driving foreign exchange trends. And that, says ING's Chris Turner, is why the pound can be an outperformer amid all the Brexit confusion
As per FOMC Preview, our economists expect the Fed to retain a cautious bias, reducing interest rate hike projections from two to one for this year and likely formally announcing the end to quantitative tightening by year-end. The GDP growth forecast should be largely unchanged. While market expectations are running high and a dovish tilt is largely expected, the lack of downward revision to the GDP growth outlook (as opposed to the ECB which cut its growth forecast meaningfully earlier in the month) should be non-negative for risk assets and continue benefiting LatAm FX. We thus see some mode...
We enter into a 1s3s HUF IRS flattener as the cautious and gradual NBH policy normalization is at odds with the very aggressive market pricing, mainly for 2020 and 2021 (with the market pricing Bubor at close to 2% by end-2021). The flattener should in our view work in the case of either (a) NBH over-delivering this year; or (b) NBH under-delivering in response to the EZ slowdown. We target 25bp return over 6 months.
We pay 1y1y PLN as an attractive risk adjusted trade to position for a tight Polish election race ahead of the May EU/October general election. This may lead to (a) an additional reflationary fiscal easing and (b) speculations the NBP/MPC would turn less dovish/more hawkish given heavy utilisation of fiscal easing among available policy options. In the meantime, CPI is expected to return almost to the MPC target between now and summer while the NBP claims the fiscal impulse removes cuts from the discussion. With the market pricing only 8bp of hikes in 2-years' time, 1y1y PLN payer offers good ...
Asset market volatility continues to sink across the board and in the FX market we're now looking at the lowest levels in five years. Clearly the Fed's pause and what it means for interest rate volatility is helping, with the Fed having recently been joined by the ECB in a long path for unchanged policy rates. And should the Fed look to slow/stop its balance sheet unwind earlier than expected (we should hear more on this tomorrow) this should only encourage the softer trend for volatility. Assuming Washington does not turn more aggressive on trade in the near future (Europe looks more under t...
The highlight of the US calendar this week should be Wednesday's FOMC meeting, where its 2019 data-dependent approach should be repeated. The market is probably expecting some down-shift in the Dot Plots (which currently see two hikes in 2019 and one in 2020), plus some more discussion on the end of Quantitative Tightening - i.e. stopping its balance sheet reduction. This should maintain a positive environment for risk, especially if the European story can somehow improve (see below). The strong rally in risk assets this year will be asking question of under-invested fund managers, where siz...
Flat yield curves and the prospect of unchanged G3 monetary policy into 2020 have seen volatility collapse across G3 FX pairs. Yet there's plenty going on elsewhere with Brexit, tightening in Eastern Europe and a re-assessment of some Asian FX trends. Local stories and relative value will be in focus this month
EUR/USD has been supported by GBP and we see that trend continuing in the near term. As above, investors were very pessimistic on Europe at the start of the year (and underweight European assets) and there's a case to be made for a modest re-rating of European FX if trade trends calm, China can support its domestic economy and clarity emerges on Brexit. In a week's time we'll see the March PMI releases for the Eurozone, which could show some more stability – e.g. will manufacturing PMI follow services higher? Negative rates in the Eurozone don't make EUR/USD an attractive proposition for the t...
Although it was non-binding, last night's vote that parliament would never countenance a No Deal Brexit at least demonstrates a coalition of the willing – and has supported the GBP. PM May has now artfully returned her MV to today's motion on a short Article 50 extension to 30 June. If passed, MV3 needs to happen before 20 March, such that PM May has a reason to ask the EU for a short delay. Recently we've been suggesting Cable can be volatile in a 1.30-33 range (which it largely has), but if momentum is moving towards either: a) MV3 somehow being passed as Brexiteers are scared into submiss...
USD: Continue to favour strength in USD/JPY: The dollar is proving a bystander to events overseas at present, but retains a gently bid tone. The US DGO release today is unlikely to be a game-changer and instead we continue to focus on USD/JPY, where high USD hedging costs and a BoJ meeting on Friday favour a return to the 112.20 area.
Of the many event paths for GBP this week, the one that was least expected – May's Withdrawal Deal getting approved – is back in the running. The central release after May met Juncker yesterday is an Instrument relating to the Withdrawal Deal that spells out the recourse to the arbitration panel (already in the Withdrawal Deal) should the EU try to apply the backstop indefinitely. PM May will market this as securing a legal change to the backstop, though it really is one for the lawyers. Here Attorney General, Geoffrey Cox, will address parliament this afternoon and presumably will revise h...
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