Stock markets are selling off as AI spending concerns and the renewed gains in crude oil prices weigh on risk sentiment. The flight to safety is supporting Treasuries and driving JPY and CHF outperformance.
With no policy-relevant data releases today, we take stock of speculative FX positioning in the charts below. The data, as of October 13, suggest the net long USD trade is not overcrowded, leaving room for renewed buying. Still, sizeable shorts in EUR, GBP, and AUD could fuel further short covering. By contrast, speculators are already net long JPY which may limit its relief rally.
NEW ZEALAND
NZD/USD recovery lost steam after testing a one month high at 0.5710. New Zealand Q3 CPI undershot expectations. Headline CPI increased 0.7% q/q vs. 1.5% in Q2, below the 0.8% rise forecast by consensus and RBNZ. Annual inflation eased to 3.7% vs. 4.1% in Q2, also below consensus of 3.8% and RBNZ’s 3.9% forecast.
Despite the softer headline reading, underlying inflation points to persistent price pressure. The RBNZ sector factor model printed at 2.8% y/y for a second straight quarter, near the top of its 1-3% target range. Meanwhile, CPI ex. petrol remained at 3.2% y/y for a fourth consecutive quarter.
Above target inflation and still elevated oil prices argue for additional RBNZ rate hikes. The swaps curve price in 85% odds of a 25bps RBNZ rate hike to 3.00% on October 28 and more than 100bps of tightening over the next twelve months to 3.75% - near the upper end of the RBNZ’s estimated neutral range of 2.20%-4.10%. Nonetheless, NZD/USD upside is constrained because Fed tightening curbs the scope for policy convergence.
KOREA
USD/KRW is down near a two-year low. Bank of Korea delivered a hawkish hold. As was widely expected, Bank of Korea (BOK) kept rates on hold at 3.00% after hiking the last two meetings.
The decision was unanimous and the guidance pointed to further hikes ahead which remains KRW supportive. The statement stressed that “the domestic economy is expected to maintain its high growth rate…while inflation is projected to remain above the target level [2%] for a considerable time.”
PHILIPPINES
USD/PHP rallies to a fresh record high despite the Philippine central bank’s (BSP) hawkish surprise. BSP raised the policy rate 50bps to 5.50% vs. 25bps expected, citing “broadening price pressures and further upside risks to inflation.”
Indeed, headline inflation has exceeded the bank’s 4% upper tolerance band since March, quickening to 7.2% y/y in September. The faster tightening pace should boost confidence in the BSP’s ability to bring inflation under control and ease downside pressure on PHP.
