News & Analysis


With CNY and JPY weakness extending the dollar’s rally on Friday, all eyes yesterday were on whether policymakers would allow such price action to continue, triggering a new regime of weaker Asian FX more generally. However, as noted yesterday, policymakers from both China and Japan pushed back on market forces;  the People’s Bank of China placed the daily USDCNY fix at its lowest level relative to model estimates since early November, driving the countercyclical factor to its widest since early November, and Japan’s top currency official stated he is closely watching moves in the FX market. Today’s overnight session has seen more of the same in this regard. The PBoC lowered the USDCNY fixing by a further 0.1% to 7.0943, leaving the countercyclical factor relatively wide at 1076 pips, although down on 1226 pips yesterday, while Japan’s Finance Minister Suzuki compounded comments by currency official Kanda yesterday by stating that he is “watching FX moves with a high sense of urgency”.

In a similar fashion to yesterday, these overnight developments are keeping the dollar’s rally in check, but it is fairly easy to contain further depreciation given the relatively light economic calendar. The real test for Asian policymakers and markets will be from Wednesday evening onwards, where commentary from the influential Fed Governor Waller, February’s US PCE report, and an appearance by Chair Powell could lift Treasury yields and provide markets with the fundamental rationale to test the boundaries of further intervention. This risk is already being factored into hedging products. Three-month yen basis swaps, used by Japanese money managers to protect against a stronger yen, have risen to levels last seen in January 2022, indicating reduced hedging demand. Meanwhile, in the options space, 3-month risk USDCNY risk reversals continue to skew in favour of calls over puts, indicating a higher price of hedging upside in the pair. That said, the cost of calls have decreased from last week, suggesting traders are hedging the risk of managed yuan  depreciation as opposed to a sharp sell-off like Friday.

Outside of the Asian complex, market conditions are relatively benign. This is likely to remain the case in  advance of Governor Waller’s appearance on Wednesday evening, with only the National Bank of Hungary’s interest rate decision and bi-weekly inflation data and BCB minutes from Brazil of note today.


With the dollar partially reversing course yesterday on pushback from Asian policymakers, the single currency managed to eke out a 0.25% rally, bouncing from the bottom of its one-month range. That said, price action in EURUSD was largely a factor of dollar dynamics. It didn’t necessarily reflect the mood music from the ECB, which turned notably more dovish yesterday as Banco d’Italia Governor Panetta said there is growing confidence amongst the Governing Council to cut rates, while Chief Economist Philip Lane hailed the normalisation in wage measures, further evidence of which the ECB are awaiting in May before they set their sights on cutting rates. As we have noted in recent weeks since the ECB’s decision, a deeper easing cycle from the ECB relative to the Fed should ultimately drag EURUSD lower from current levels, especially if the depth of the Fed’s easing cycle isn’t significant enough to boost overall risk sentiment. Whether or not this becomes a near-term consideration for markets will depend on March’s flash inflation data, which is progressively released in the week from Wednesday.

Ahead of this, European traders are likely to turn their attention to Hungary, where a policy announcement from the NBH is due at 13:00 GMT. Consensus expectations project a 75bp cut from the NBH, a step down from the 100bp of easing delivered last month. We are inclined to agree with markets on this occasion, for two key reasons. First is the ongoing spat between the NBH and the government over a proposed law change that threatens the central bank’s independence. NBH policymakers have proven averse to dovish policy moves under similar scenarios. Indeed, a similar situation in January saw the NBH surprise markets with a 75bp cut, even as a larger 100bp cut had been widely expected. Second, the currency has weakened sharply over the past month. In part this is a consequence of the tensions between the central bank and the government, but it is also a result of February’s decision to accelerate the pace of rate cuts. Maintaining the current pace of easing risks exacerbating the forint selloff, stimulating imported inflation pressures, suggesting to us that the balance of risks favours a return to easing in 75bp increments, with risks tilted towards a smaller cut given this latest row with the government. All told, we think this should stabilise the forint around current levels for the time being as traders take stock, though we expect that ongoing carry erosion should ultimately continue to produce a slow grind higher for EURHUF over coming months.


Sterling rose three tenths against the dollar on Monday, unwinding some of last week’s losses as a quiet data calendar offered traders the opportunity to take stock of last week’s market moves. On the UK side of the equation this meant a modest unwind of BoE easing expectations, which as we noted in yesterday’s morning report, seemed overly aggressive to us coming into the week. This was arguably in spite of a speech by the BoE’s resident uber-hawk, Catherine Mann, yesterday. Mann said little, despite joining the consensus on calling for a hold in Bank Rate in March, which in context marks something of a dovish shift from her typical policy stance. With Mann due to make another appearance today, the only UK event of note, another quiet day is likely to be in store for the pound, offering traders a further opportunity to reassess the potential path for UK rates.


USDCAD has started the new week treading water, sliding marginally on Monday with limited newsflow offering little direction for the pair. Even this, however, is worthy of note. Despite a decent move higher for oil on Monday, CAD arguably underperformed, posting smaller gains than most other high beta G10 FX, in particular the similarly oil sensitive NOK. In our view this once again highlights traders unwillingness to build long CAD positions, in light of weak underlying economic fundamentals and building risks that the BoC’s tight policy stance will ultimately prove a policy error. They may have further reason to remain cautious today as well. Significantly, BoC Senior Deputy Governor Rodgers is set to speak at 12:00 GMT on the urgent need to improve Canadian productivity. From a markets point of view, close attention will be paid to any signs of dissent when compared to Governor Macklem’s recent hawkishness, a dynamic suggested, but not confirmed, in the BoC’s March summary of deliberations. Indeed, with markets pricing the odds of a cut at next month’s meeting at just less than 20%, the balance of risks for USDCAD stemming from Rodger’s speech looks asymmetrically skewed to the upside to us. There seems little scope to trim April easing bets following last week’s soft CPI print, even if Rodgers does come across as hawkish. But a dovish pivot from the Senior Deputy Governor could potentially see the odds of an April cut begin to rebuild, an outcome that would, in turn, likely weigh on the loonie this afternoon.



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