A softer environment has caused Chinese authorities to tighten the screws on those with short renminbi positions. Further dollar weakness is possible today, given the risk of the lowest US existing home sales data since 2010 and some FOMC minutes that could be read less aggressively. Elsewhere, eye on 75bp base rate cut in Hungary
USD: Existing home sales data in focus
The dollar continues to fall as investors reduce their long-held positions ahead of the US public Thanksgiving holiday on Thursday. We are currently going through a relatively benign phase for global asset prices, where even last night’s US 20-year Treasury auction went better than expected and temporarily allays concerns about the US fiscal path. The auction results caused US yields to fall by 4 to 5 basis points at the long end of the curve and have helped reduce short positions in the yen further. Tokyo will be delighted with this move in .
Today, the focus will be on the US existing home sales data for October and then the release at 20:00 CET of the FOMC minutes from the November 1 meeting. As for the former, ING’s US economist is looking for a sub-consensus figure of 3.88 million units, which would mark the lowest reading since 2010. Driving that low number will be mortgage rates near 8% and show the low data on mortgage applications. If the data matches our thinking, it should be negative for the dollar, showing that the rate hikes are working.
At the end of the day, investors will pore over the FOMC minutes. These were the minutes in which the Federal Reserve included the tightening of financial conditions as a factor that would likely weigh on activity. The market seems to be in the mood to pick up less hawkish headlines and any signal suggesting the Federal Reserve might be done with a tightening would be interpreted negatively for the dollar.
It traded below support at 103.45 overnight (now resistance) and could move towards 102.95/103.00 and possibly 102.55 depending on today’s data and minutes.
CNH: Shorts on the run
Not many, including us, expected to trade back at these 7.14 levels so soon. Our thinking had been that while the Chinese authorities did not want the renminbi to weaken further – and were defending it at 7.30 – they also did not want it much stronger as they tried to revive their sluggish economy.
However, two factors have caused the renminbi to strengthen today. The first is that the People’s Bank of China (PBoC) offers a much lower than expected USD/CNY peg. This suggested that not only was he happy to see USD/CNY return to the 7.17 level it had been at for the past few months, but he wanted it to go even lower, hence today’s 7.14 level. Furthermore, the People’s Bank of China drained liquidity when it was not necessary, which could be interpreted as a new attempt to expel those holding short positions in renminbi.
It is unclear to what extent Chinese authorities would like the USD/CNY pair to be lower and local authorities cannot necessarily rely on a weak dollar environment for long. But in the short term, we believe these measures can boost the broader Asian currency bloc and contribute to the current weak dollar environment.
EUR: Dining out amid a weaker dollar
It will probably surprise many by approaching the 1.10 level. And the dollar’s heavy weight in the European Central Bank’s trade-weighted euro index also means that the euro has retraced half of its decline since July without any major (positive) reassessment of the region’s growth prospects.
Once again we would expect the dollar story to dominate today. Some weak US existing home sales data is probably the best opportunity for EUR/USD to break the 1.0960/65 resistance and test the 1.10 level. But without near-term US yields starting to fall substantially (e.g. yields holding at 4.90%), we would be reluctant to chase EUR/USD too much above 1.10. Likewise, as we mentioned yesterday, another bad set of European PMI readings on Thursday could weaken the euro again.
The Eurozone data calendar is very light today and in terms of the ECB story, it seems that investors may be getting ahead of expectations about the first ECB cut. The market now prices 33 basis points of easing for the June meeting.
ECO: Recovery in Poland, more cuts in Hungary
Today we have monthly data in Poland for October, including industrial production, PPI and labor market. And more data will arrive tomorrow. Overall, we should see confirmation of economic recovery in Poland in the fourth quarter. Later we will see the decision of the National Bank of Hungary (NBH). In line with the market, we expect another 75bp rate cut to 11.50%. This intention was communicated in advance by the deputy governor of the NBH last week, so we do not have much uncertainty about it. But we will continue to watch the press conference to see how confident the central bank is about the next steps.
The zloty reached another record level yesterday at 4,360 and this time it was accompanied by an increase in market rates. Therefore, PLN should maintain its gains this time longer than during last week’s attempts. Unless today’s data disappoints, we expect higher rates to further push PLN to stronger levels. The next target here is clearly 4,340 EUR/PLN. Looking ahead, while we expect further gains in this area, they are likely to be slower given positioning and the diminishing upside potential for market rates.
The forint jumped above 380 yesterday for the first time since the beginning of the month, a day before the central bank meeting. As we have mentioned in recent days, the relationship between rates and currencies is resuming and was on display yesterday. Furthermore, the market continues to price in more and more rate cuts, which is in line with our forecast. However, the impact on the exchange rate here is unclear. If the market wants to recover the divergence of the last few weeks, this would mean a significant sell-off of HUF. This is unlikely to be the case, but today we could still see more losses if the BNB confirms that the rate cuts continue. However, in the medium term we remain positive on HUF. In our opinion, weaker levels can clear strong positioning for another rally later.
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