FX & Money Markets Daily: The Dollar Extends Its Rally

Today's Comment

Majors & Scandies

Yesterday we saw a short rally in EURUSD early in the European trading session. However, the gains made by the euro disappeared rather quickly as the dollar rallied again and extended its gains it has made over the last few weeks late in the US trading session on further weakness in oil and commodities. There are currently two cases going on in the FX markets: the euro game and the dollar game. We are witnesses to a broad weakening (sell-off) of the euro and a broad strengthening (rally) in the dollar. As we argued yesterday, our base scenario still calls for at least a short pause in the current EURUSD sell-off. The tradeweighted euro index is currently testing 200- day moving average and should offer some support. However, even if we get a short pause in the dollar rally, then the risk remains on the downside. We have adjusted several of our short-term ranges to account for the increased volatility. As we have no current short-term recommendations on majors and scandies you might find it helpful to refer to our long-term targets.

Consumer prices from the UK are the most important macroeconomic data release today. The inflation in the UK is at present at the highest level since 1992 (3.8%), but it is primarily driven up by food and energy prices. Removing food and energy from the calculation leaves us at a more modest 1.6%. Our expectations of the CPI today: 'It is going to be ugly'. The market is expecting a reading around 4.2%, which is considerably above Bank of England's target of 2.0%.

Emerging Markets

Yesterday was another positive day for EM, with e.g. the TRY notching up further gains against the EUR and the CZK regaining some of what was lost over the last week or so. The biggest winner on the day was the ISK, however, as a big drop in the CDS spreads for the Icelandic banks gave the battered northatlantic currency some much needed tailwind. Despite a drop of some 100bps over the last couple of days, the 5-year CDS spreads for the two largest Icelandic banks remain around 950bps. Hence, although implied interest rates in the forward market now trade around 9-13 % and the ISK thus again offers solid carry, we will await better sentiment towards the Icelandic banks before going long the ISK. Looking ahead to today, the global calendar is practically empty and the EM calendar offers only Hungarian inflation. With several key releases due later in the week (including rate meetings on Turkey and South Africa and inflation and retail sales from the US), we could thus be in for a quiet day on EM today. This should leave plenty of time to watch the Olympics (not the least considering that the Indian Summer we are hoping for still has not materialised) - and Wozniacki has given Denmark a bright start to the day and a much needed success, beating the world's number 12 in straight sets!

Today's key events

• 10:30 Consumer Prices, GBP
• 14:30 Trade Balance, USD

Jyske Core Positions - Recommendations

Jyske Markets - FX Research
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