Data-Light Day Ahead

August 20, 2024

Elias Haddad

Data-Light Day Ahead

USD is consolidating near year-to-date lows while US and European equity futures extend recent gains.

The Riksbank is widely expected to cut the policy rate 25bps to 3.50%.

Turkey’s central bank is expected to keep rates steady at 50.00%.

USD is stabilizing after falling yesterday against all major currencies to its lowest level since the start of the year. Money market expectations for an aggressive Fed easing cycle and the recovery in global equity markets, are weighing on USD. Today’s August Philadelphia Fed non-manufacturing activity index (1:30pm London) will not dent Fed funds future pricing for roughly 100bps of cuts by year end.

Scheduled Fed speakers later today could generate some market volatility. Atlanta Fed President Raphael Bostic (FOMC voter) speaks in a fireside chat about innovating for inclusion (6:35pm London) and Fed Vice Chair for Supervision Michael Barr speaks on cybersecurity (7:45pm London). Both talks have Q&A sessions.

EUR/USD is consolidating recent gains around 1.1075. EUR and Eurozone yields ignored dovish comment by ECB Governing Council member Olli Rehn. Rehn warned “in my view, the recent increase in negative growth risks in the euro area has reinforced the case for a rate cut at the next ECB monetary policy meeting in September — provided that disinflation is indeed on track.” The swaps market has fully factored in a 25bps September rate cut for several weeks now. The Eurozone June current account data (9:00am London) and final July CPI print (10:00am London) are today’s highlights.

SEK is firm versus USD and EUR. The Riksbank is widely expected to cut the policy rate 25bps to 3.50% (8:30am London). The swaps market sees 20% odds of a larger 50bps move today and 100bps of total easing by December 2024. We expect the Riksbank to trim the policy rate 25bps and reiterate that more rate cuts are in the pipeline by year-end. Inflation in Sweden is tracking the Riksbank’s June forecasts. Updated macro forecasts will come at the September 25 meeting.

AUD/USD is holding above 0.6700 underpinned by positive Australia-US 10-year bond yield spreads. The RBA August meeting minutes showed members discussed the options of raising the cash rate target or holding it steady. The case to raise the cash rate was supported by persistent underlying inflation and to counter market expectations that the cash rate would be lowered several times later in 2024. Ultimately, members decided that the case to leave the cash rate target unchanged was the stronger one. Members also agreed that “it was unlikely that the cash rate target would be reduced in the short term, and that it was not possible to either rule in or rule out future changes in the cash rate target.” The swaps market continues to imply about 90% probability of a 25bps rate cut by year-end. That’s about right in our view.

NZD/USD edged higher in line with improving financial market risk sentiment. New Zealand’s annual merchandise trade deficit narrowed to a 27-month high at NZ$-9.3bn in July driven by a 14% y/y rise in exports. This will lead to a further modest reduction in New Zealand’s large current account deficit (which totaled -6.8% of GDP in Q1) and over time lessen the drag to NZD.

CAD will take its cue today from Canada’s July CPI print (1:30pm London). Headline CPI inflation is expected at 2.5% y/y vs. 2.7% in June, core median is expected at 2.5% y/y vs. 2.6% in June, and core trim is expected at 2.8% y/y vs. 2.9% in June. The Bank of Canada (BOC) projects headline and core (average of trim and median CPI) inflation to average 2.3% y/y and 2.5% y/y in Q3, respectively. Slowing inflation in July would cement market pricing for an additional 75bps of BOC easing by year-end and curtail CAD upside.

JPY is underperforming and Japan stock market recovered Monday’s slump. Japan’s ruling Liberal Democratic Party (LDP) election committee fixed its leadership election date for September 27. The campaign period will begin September 12. Whoever wins the LDP leadership contest will become the new Prime Minister. General elections aren’t due until 2025, but it’s possible the new Prime Minister calls early elections to solidify support.

Turkey central bank is expected to keep rates steady at 50.00% (12:00pm London). At the last meeting July 23, the central bank left rates at 50.00% for the fourth straight time and warned that inflation pressures remain “alive.” Regardless, the swaps market is still pricing in the start of an easing cycle over the next three months as underlying inflation in Turkey is cooling. Core inflation slowed to a one year low of 60.2% y/y in July from 71.4% in June largely due to base effects.

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