Sterling crash, Italy swings right, PBoC support for the yuan
OVERNIGHT NEWS
# GBP crashes to record low of 1.0350/USD, BoE declines to comment, speculation rife of emergency rate increase. Chancellor Kwarteng yesterday doubled down on fiscal plans, saying there’s more to come” and £45bn of tax cuts was just the start, 10y Gilt +23bp to 4.06%
# Dollar index surges to 114.52, EUR/USD touches 0.9554 low. 10y UST and Bund yield +10bp, S&P futures -0.8%.
# Italy swings right after Meloni led right-wing alliance wins general election, with 44.1% of votes vs 26.3% for centre-left coalition.
# China: PBoC raises reserve requirement for forward FX trading to 20% (effective 28th September), sets yuan fixing at 7.0298/USD. USD/CNH touches 7.1738 high.
# CFTC positioning: hedge funds turn net long EUR 5.1% of OI before FOMC last week, JPY shorts raised to 32.3%, GBP shorts reduced to 20.6%, AUD trimmed to 26.9%, CAD longs shaved to 1.3%, CHF shorts steady at 16.5%.
# Weekly Technicals: 10Y UST, EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CNY, USD/INR, USD/SGD, USD/KRW, USD/HKD, USD/MYR, USD/IDR, USD/MXN, USD/BRL, USD/TRY.
# Nikkei -2.7%, EUR 10y IRS +12bp to 2.97%, Brent crude -1.8% at $84.6/b, Gold -0.1% at $1,642/oz.
GBP/USD crashed to a new all-time low this morning of 1.0350
In EM, the PBoC announced it will impose a risk reserve requirement of 20% on banks’ FX forward sales to clients in a bid to mitigate weakness in the yuan after the currency nears the lower end of the permitted trading band. The currency has lost 12% since April against the dollar and returned to the lows of 2019. We expect the National Bank of Hungary to raise the base rate by 100bp to 12.75% tomorrow. Inflation scaled a 24-year high of 15.6% in August and MNB Dep Governor Virag last week said that options were on the table for 50bp, 75bp or 100bp. EUR/HUF is currently trading on the weaker side of 400 and the possibility of EU funding drying up may force the MNB to hike 100bp. The Czech National Bank may opt for the status quo on Thursday. Technically, EUR/CZK looks set for a rebound towards 25.00 following the weekly close above the 200dma of 24.65 on Friday. The Thai Baht is trading at a 16-year low of 37.45/USD and this should prod the BoT to raise rates by another 25bp to 1.0%. Elsewhere in Asia, we think the Reserve Bank of India is likely to defend the INR amid shrinking FX reserves by lifting the key repo rate by 50bp to 5.90%.
Main Events to Watch in EM This Week: September 26, 2022
This week in EM, we are keeping an eye on monetary policy meetings in Mexico, Colombia, the Czech Republic, Hungary, India and Thailand. In global markets, it should be a quieter week in terms of data releases.
EM radar: We expect a relatively quieter week in terms of EM-relevant global data releases, though US data prints such as PCE, jobless claims, housing market indicators and 3Q GDP will remain closely watched. Beyond DM developments, we think that the market will also remain alert with regards to potential PBOC announcements, given the recent sharp depreciation in CNY. As highlighted in our recent update, the PBOC continues to count on a wide variety of tools that it could use to tackle the recent volatility in the currency, including direct FX intervention, using the counter-cyclical factor to make the CNY fixing stronger, or further RRR cuts.
This coming week we will also be keeping a close eye on Colombia’s monetary policy decision, where consensus estimates point to a 150bp increase in the policy rate. We note that market-implied expectations for the upcoming meeting are currently hovering around a 125bp hike (122bp priced in).
As a reminder, at the previous meeting BanRep also delivered a 150bp hike, but during the press conference the governor hinted at potentially slowing down the pace of hikes going forward.
However, the backdrop for slowing down the pace of hikes in Colombia has deteriorated since the July meeting, given further increases in local CPI pressures and a significantly more hawkish FOMC (to which Colombia remains extremely vulnerable via its wide twin deficits).
As such, we do not expect the board to slow down the pace of hikes in the September meeting and we think that any attempt to do so would be accompanied by significant market pressure on COP. While market pricing points to expectations of a terminal rate around 12.75% by 2Q23, suggesting that most of the aforementioned deterioration is already in the price, we think that risks remain skewed towards even more front-loading of pricing and we maintain a paid bias in the front end of the IBR curve.