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The British Currency Finds Some Relief in Asian Dealings


Kwarteng’s sacking on Friday triggered a core bond relief rally with UK Gilts outperforming. Prime minister Truss appointed Jeremy Hunt as his successor and gave a press conference later in which she dropped an £18bn corporate tax cut plan. But it did little to convince markets fundamentally. UK bond yields bottomed, erased previous losses and eventually rose between 11.6 bps (2y) to 23.4 bps (30y) in the UK. It was a screeching intraday turnaround of more than 50 bps, supported by the Bank of England leaving the market after having bought a total of just £1.4bn+ bonds on the last day. European yields rose in lockstep, adding 3.5 bps to 9.8 bps in a steepener. US yields lagged peers but caught up after the release of the Michigan consumer confidence in which one-year inflation expectations unexpectedly rose north of 5% again. The 5-10y gauge (2.9%) topped 2.8% estimates too. Bets for Fed rate hikes lean towards a 5% terminal rate, in line with the analysis of Fed’s Daly last week. US yields advanced 3.2 bps at the front end to 6.6-7.7 bps at longer maturities with the 10y yield closing above 4% for the first time since ’08. US equities tanked more than 3% (Nasdaq), erasing about half of the gains seen in the historical intraday reversal on Thursday. The dollar dominated FX space. USD/JPY soared beyond the 1998 high to close at 148.67. EUR/USD losses could have been bigger though (close at 0.972). Sterling remained in the defensive. EUR/GBP closed above 0.87 and Cable eased to 1.117. The British currency finds some relief in Asian dealings after Hunt in an interview yesterday said nothing is off the table when asked if other measures in the minibudget could be abandoned. It’s a stark contrast with Truss herself last week saying she expects Hunt to agree to no more U-turns. It makes us question the underlying strength of the move this morning. We’re also keen to see the Gilt market open without the Bank of England’s backstop. Things remain interesting politically too. More Tories call for Truss to resign. Hunt met with the BoE and the Debt Management Office last night and will make a statement on the medium-term fiscal plan later today. USD/JPY holds steady near a 30-year high and government officials are back with unconvincing verbal interventions. Chinese authorities fixed the yuan at USD/CNY 7.1095 but you can’t fight market forces. USD/CNY is attacking previous cycle (closing) highs of 7.20 on yuan weakness. Chinese president Xi Jinping at the Communist Party congress said economic development remains top priority but signaled no change in the damaging zero-Covid policy. EUR/USD heads north to 0.975, the DXY takes a breather at 112.97. US Treasury yields lose a few bps and German Bund futures trade higher. We wouldn’t be surprised to see some short-term consolidation in core bonds (UK Gilts not included, to be clear) near their recent highs as markets await new impetus from the likes of the ECB (next week). EUR/USD should hold on in the 0.95-1 trading range.

News Headlines

The FT reports that the European Commission is likely to freeze regional aid to Poland as the country’s suppression of judicial independence still interferes with the EU’s charter of fundamental rights. Warsaw already made some reforms to its system for discipling judges, but these don’t go far enough. At stake is a total of €76.5bn of cohesion funding. The EC did already sign off on three of Poland’s cohesion programme initiatives (big infrastructure & green investments) for which unconditional prefinancing is available (0.5% of the overall amount). The first tranche of the pandemic-related EU recovery fund (€2.85bn in grants and €1.37bn in loans) is also yet to be released. The Polish zloty starts the week on the back foot with EUR/PLN rising from 4.80 to 4.85.

A draft EC proposal seen by the FT suggests that Brussels wants to set a maximum dynamic price at which gas transactions can take place on the Dutch Title Transfer Facility (TTF), the benchmark for the bloc. The proposals also include measures to limit volatility in energy derivatives markets, as well as a longer-term project to create a new benchmark for liquefied natural gas. Urgent measures are also needed to ensure member states co-operate more effectively on gas purchasing, with a particular focus on refilling storage facilities next year. EU leaders meet on Thursday and Friday in Brussels to find joint solutions to tackle the energy crisis.

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