Markets
Yesterday’s UK-led violent sell-off at the short end of the curve eased – but not really reversed – today. In a pretty dull trading session lacking trading opportunities in the form of economic data or others, the UK yield curve stayed pretty much stable in tenors ranging from 2-7 years. Long maturities were mixed with the back of the curve outperforming (30y: -1.5 bps). Turning to Germany, the yield curve there bear steepened with the long end (30y: +4.5bps) undoing yesterday’s remarkable outperformance. The 10y (-0.12%, +3.1 bps) yield erased early morning weakness in technical trading, finding support at the lower bound of the upward sloping trend channel. Changes at the short-to-middle end ranged from +1 bp to +3 bps even as ECB’s Villeroy pushed back against market expectations of a first (small) rate hike already next year. Expressing similar views, ECB’s Rehn said inflation is expected to moderate next year and that there’s no evidence of wage pressures yet. The US curve steepens as well but is the only one to give up some of the yield gains in the 2y (-3 bps) to 5y (-2.3 bps) segment but with the long end underperforming (30y: +2.5 bps). The divergence on the curves’ front end might explain today’s dollar weakness despite an otherwise fragile equity environment (marginal gains up to 0.1-0.3%). It is performing poorly against all majors, including the euro. EUR/USD tested first meaningful resistance around 1.1664 (August interim low) but fails to push through (1.1648 currently). Technical indicators do suggest EUR/USD bullish/USD bearish momentum has returned. The trade-weighted DXY finds itself below the parallel August temporary high of 93.73. The dollar trades in the defensive vs sterling too. Cable surpassed/tests the 1.38(1) barrier where the 100dMA acts as resistance. This is also the result of an overall solid pound too though. EUR/GBP slips back below important support at 0.845 at the time of writing. It did so last Friday as well but the break wasn’t confirmed yesterday. If it does after all, the technical picture drastically improves for the UK currency with EUR/GBP 0.84 the only intermediate support zone standing in the way for a return to 0.8277/82 (2019/2020 low).
News Headlines
Average gross wages in Poland in September were reported at 0.0% M/M and 8.7% Y/Y compared to a rise of 9.5% in August. Employment eased 0.1% M/M to be up 0.6% Y/Y. Both series were marginally softer than expected. The National Bank of Poland last week changed course on its inflation strategy and raised the policy rate 40 bps to 0.5% to address an acceleration in inflation. At the same time, the row between Poland and the EU on the ruling of the Constitutional Court of Poland that parts of EU law were incompatible with the Polish Constitution was subject of an intense debate at the European Parliament. EU Commission President Ursula von der Leyen said the Polish ruling calls into question the foundations of the European Union. She said the EU as three options: a legal challenge to the Polish decision, potentially ending up with fines. A second option is withholding EU funds for Poland. A third option could be applying Article 7 of the EU’s Treaties, suspending the rights of the members state, including the right to vote on a EU decisions. At least for now, the debate didn’t cause any further damage for the zloty. EUR/PLN even declined slightly to 4.57.
In line with its policy decision last month, the National Bank of Hungary (MNB) today continued its hiking cycle with another 15 bps rate hike, bringing the policy rate to 1.8%. At the start of the rate hike cycle, the MNB in June, July and August initially hikes rates at a 30 bp pace. In its policy statement, the MNB reiterated that ‘In the decision-makers’ assessment, the inflation outlook continues to be surrounded by upside risks which might prove to be more persistent than earlier expected. For this reason, the Council considers it necessary to continue the monthly interest rate tightening cycle’. The forint lost modest ground after the MNB policy decision with EUR/HUF trading at 361.
