Sunset Market Commentary – Forex Action


Core bonds began to slide heading into the US session after a lackluster European encounter. There is no clear driver, however profits at Wall Mart and Home Depot offered a sigh of relief to investors. Earnings beat (lowered) estimates as retailers showed more resilience than expected. The at least temporary results set aside very bleak growth forecasts. Tomorrow’s US retail sales may confirm this narrative. Brent crude also recovered somewhat from yesterday’s blows (Brent is back above $95/b). US yields add 5.2 basis points to 6.8 basis points, with the belly of the curve underperforming the wings. The German yield curve is steepening with yields adding 6 basis points (2 years) to 9.3 basis points (30 years). German 10-Year Yield Tests 1% Resistance (August High and Corrective Downtrend Channel Top) Today’s Ecological Calendar is Content United States housing data (particularly housing starts) which continue to point to a decline in demand (growth fears and high mortgage rates) and a recovery in inventories and German ZEW investor sentiment which more or less stabilized near July levels. In the FX space, EUR/USD temporarily dipped below 1.0150 but the pair remains broadly near yesterday’s lows. The pound slightly outperformed (EUR/GBP 0.8422), but the British labor market had nothing to do with it. UK employment rose by 160,000 in the 3 months to June, below the consensus of 268,000, with the unemployment rate stabilizing at 3.8% over the same period. Average weekly earnings accelerated to 4.7% Y/Y ex. Bonuses. Monthly data (July) showed net job gains of 73,000 with unemployment insurance claims down 10,600. UK job vacancies fell for the first time since August 2020. The calendar British Eco remains interesting with inflation figures (tomorrow) and retail sales (Friday). News headlines:

The Canadian CPI rose 7.6% yoy in July, up from 8.1% yoy in August and in line with consensus. A deceleration in gasoline prices was the main culprit. Excluding gasoline, prices rose 6.6% year-on-year, compared to 6.5% year-on-year in June. Monthly price momentum slowed to 0.1% in July as lower gasoline prices (-9.2% M/M) were offset by higher prices for other non-durable goods and personal services . Inflation continues to outpace year-on-year wage growth (5.2% in July) even though the purchasing power gap has narrowed compared to June. Persistent broad-based inflationary pressures suggest the Bank of Canada will continue its aggressive tightening cycle into early September. Governor Macklem and co began preloading rate hikes in July with a surprise move of 100 basis points. Canadian money markets are in disagreement as to whether the next move will be 50 basis points or 75 basis points. The loonie rose briefly on the inflation release, but was unable to recoup yesterday’s losses. The strength of the dollar and the collapse in the price of oil yesterday propelled USD/CAD from 1.278 to 1.29, where it is still trading at the moment. The Canadian swap yield curve becomes more inverted today, with yields rising from 8.5 basis points (2 years) to 3.9 basis points (30 years).

The new trading week saw back to back Accommodating comments from Czech National Bank board member Frait (yesterday) and deputy governor Zamrazilova (today). According to Frait, the current level of Czech interest rates creates tight monetary conditions. It significantly emphasizes slorapid growth in new loans and first signs of a slowdown in the housing market. Further tightening by global central banks further weaken global demand with is something he wants to take into account when setting Czech monetary policy. Zamrazilova said that much of the local factors driven by domestic demand will no longer be the main driver of inflation. She points out that high food and energy prices are holding back household spending on non-essential goods. A price-wage spiral remains a risk, however. The Czech crown is on the defensive for a second consecutive session with the fighting in the Crimea aggravating the weakness of the currencies of the CEECs in general. EUR/CZK fell from 24.44 to 24.54. In June, the CNB intervened in the foreign exchange market to prevent the CZK from weakening beyond 24.75 EUR/CZK. The forint is the local underperformer, EUR/HUF going from 392 to 405 this week. The zloty outperforms its regional peers with EUR/PLN only slightly weaker near 4.70 (vs. 4.65).

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