Markets
Trends from Tuesday continued yesterday. The German yield curve further bear steepened after the approval of the German budget, rubberstamping €500 bln additional debt issuance through 2029. German yields changed between -0.8 bps (2-y) and + 2.6 bps (30-y). US Treasuries outperformed even as Fed Chair Powell in the second part of his semi-annual testimony before the Senate held to a cautious wait-and-see approach, pondering the expected inflationary impact of tariffs. Even so, markets feel that softer US labour market data and/or a milder than expected inflationary compared to the Fed’s base-line scenario still might result in faster easing than what is guided in the (median) dot plot. US yields in a bull steepening move eased between -4.4 bps (2-y) and 0.25 bps (30-y). A September 25 bps Fed cut is now (slightly more) than fully discounted. Interest rate differentials this time did matter and further pressured the dollar. EUR/USD jumped beyond the 1.1631 ST top (close 1.166). DXY just didn’t touch the 97.60 YTD low. However, the WSJ overnight elaborationg on previous rumours that Trump is considering to nominate a successor for Fed Chair Powel sooner than is usually the case (in September or October, or maybe even sooner) pushed the dollar beyond these technical barriers. Even as Powell will serve its term until May next year, market expectations on a more growth supportive approach from the new Chair might at least do part of the job with respect to money market positioning, further reducing USD interest rate support. Brent oil closed little changed near $ 68p/b. The Nasdaq (+0.31%) is only a whisker away from its all-time record.
Today’s eco calendar in EMU is thin. In the US, the May trade balance, durable goods orders and jobless claims are scheduled for release. They are not the most important ones, but high/higher than expected jobless claims still might further fuel the debate on frontloading Fed easing. Later the US Treasury will sell $44 bln of 7-y notes with markets keeping an eye at the Senate processing the big beautiful budget bill. In Europe, EU leaders join for a summit in Brussels. The war in Ukraine and sanctions against Russia probably will dominate the headlines. From an eco/market point of point, we look out for potential comments on a bigger international role for the euro. While this wouldn’t yield a big surprise/’new news’, it at least would be perfectly in line with current market momentum as markets are considering alternatives for the US dollar. At 1.168, EUR/USD is testing 76% retracement of the 2021/2022 decline, the final resistance opening up the way for a full retracement to 1.2349 early 2021 top.
News & Views
The Czech National Bank kept its policy rate unchanged at 3.5% yesterday with CNB governor Michl indicating that Czech rates may stay unchanged “for some time”. A relatively tight policy is still needed given pro-inflationary risks around the outlook. Headline inflation will be above the 2% central bank target for the rest of the year and core inflation will remain elevated over the entire forecast horizon. Domestic inflation risks include inertia in services inflation (including imputed rent) and food inflation, a further stronger recovery in lending activity (especially property), additional growth in public sector spending and continued rapid wage growth related to the tight labour market. The longer term impact of increasing barriers to international trade are unclear. Short term, they might weigh on growth (and inflation). The downside risks of a weakening German economy is countered by the planned fiscal stimulus of the new government. The Czech koruna strengthened further after the CNB hinted at the end of the normalization cycle with EUR/CZK testing the YtD low at 24.72. Czech swap rates rose by 2.8 bps to 4.7 bps with the front end underperforming as markets reduced any remaining easing bets.
The Hong Kong Monetary Authority (HKMA) took out HKD 9.42bn from circulation this morning to defend the ceiling of the USD/HKD linked exchange rate system (7.75-7.85). Last month, the HKMA pumped HKD 129.4bn currency into the system when genuine USD-weakness triggered a test of the peg’s floor. The subsequent abundance of liquidity in the HKD market led to a decline in HKD interbank rates, and the widened HKD-USD interest rate differential incentivized carry trade activities that sold HKD for USD, causing the HKD exchange rate to weaken. Other factors like the peaking of stock dividend payout season, the FX conversion of HKD proceeds raised from recent IPO’s or bond issuance by non-local companies for repatriation and the wrapping up of the seasonal half-year-end funding preparation collectively added to the HKD weakening. The HKMA will continue to closely monitor market developments and the external environment to ensure the orderly operation of the Hong Kong dollar markets.
