Shocked to the core (by the core)

Valuations and positioning are the two things that first spring to mind when thinking about FX returns this week, outside of the broad backdrop of USD depreciation on falling Treasury yields and the increased possibility of a soft landing in the US of course. Currencies subject to lighter positioning and cheap valuations due to weak fundamentals, lower interest rates or a combination thereof ranked at the top of the expanded majors currency board this week. Significant moves occurred in NOK (+6.1%), SEK (+5.6%), HUF (+5.3%) and ZAR (+4.4%), with most of the gains taking place after US core inflation printed considerably below expectations, even after the market had downwardly revised its view on the print following earlier data on US used car auction prices. But while the major moves in markets generally happened as a consequence of the positioning adjustment in a new world of lower US price pressures, plenty of other market stories took place this week. The Bank of Canada met our expectations and hiked 25bps to 5%, largely because the previous hike wasn’t enough to significantly cool a more resilient economy, the UK labour market showed the first signs of normalising as labour supply increased and demand began to cool, while the RBNZ also met our base case and held rates in line with their previous guidance. More peripheral stories on the week included the UK’s RICS data, which provided a grim report on the UK housing market’s fortunes, while inflation data out of Norway and Sweden showed that those calling early success in bringing down inflation are now having to pay the price.

With Friday’s session suggesting that most of the post-CPI adjustment is now in the rear-view mirror, markets are likely to now turn their attention to the other potential drivers of the broad dollar. The standout one next week will be China’s growth data, which could support a broad USD rebound if it undershoots already depressed expectations for Q2 and isn’t met with an immediate policy response. Furthermore, markets will be paying close attention to UK and Canadian CPI and the impact it will have on the next steps of their respective central banks, interest rate decisions out of Turkey and South Africa which are heavily influenced by the potential market response, and the build up to Spain’s snap election next Sunday.

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Authors: 

Simon Harvey, Head of FX Analysis

Jay Zhao-Murray, FX Market Analyst

María Marcos, FX Market Analyst

Nick Rees, FX Market Analyst

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