US
Re-escalation of the Middle East conflict is weighing on stocks and bonds. Crude oil prices surged and USD inched higher. The US completed yesterday a new round of offensive strikes against Iran and revoked a waiver that allowed the sale of Iranian oil in response to Iran's attacks on commercial vessels transiting the Strait of Hormuz. President Donald Trump added the tentative US-Iran ceasefire is “over” calling it “a waste of time.”
In our view, the dollar index (DXY) can edge higher. US-G6 two-year bond yields are consistent with DXY trading slightly above 102.00 and US economic outperformance should keep rate differentials supportive of the dollar.
The FOMC June 16-17 meeting minutes will shed more light about the debate behind the hawkish hold (7:00pm London, 2:00pm New York). Recall, the FOMC left the target range for the funds rate unchanged at 3.50%-3.75% for a fourth straight meeting. The policy decision was widely expected, there was no dissent, and the FOMC statement scrapped its implicit easing bias.
NEW ZEALAND
RBNZ delivered a hawkish hike, which was 70% priced by markets. NZD rallied across the board before paring back gains on a re-escalation of the Middle East conflict. The RBNZ raised the Official Cash rate (OCR) by 25bps to 2.50%, the first hike in three years, and indicated that “further OCR increases appear likely at upcoming meetings.” The RBNZ did not disclose the Committee’s vote split but indicated that the decision to increase the OCR was reached by consensus.
The RBNZ has room to normalize the OCR to more neutral levels which is NZD supportive. New Zealand inflation is still above target, and economic activity is expected to strengthen. The RBNZ estimated neutral range is between 2.2% and 4.1%. The swaps curve implies nearly 100bps of tightening over the next twelve months, which is nearly twice as much as the RBNZ policy path projection published in May.
SWEDEN
Sweden inflation slowed less than expected in June, firming year-end Riksbank rate hike bets . CPIF dipped -0.2ppt to 1.3% y/y (consensus: 1.2%, Riksbank forecast: 1.3%) and CPIF ex-energy fell -0.1ppt to 0.4% y/y (consensus: 0.3%, Riksbank forecast: 0.2%).
The swaps curve raised odds of a 25bps hike by December from 55% to nearly 100%. The tailwind to SEK from firmer rate hike expectations was more than offset by renewed Middle East tensions.
SOUTH KOREA
KRW broad rally extended, mirroring the underperformance in the KOSPI so far this month. The logic is that as Korean equities underperform and their weight in global portfolio declines, the need for foreign investors to trim positions and repatriate funds diminishes, reducing KRW outflows. By the same token, should the KOSPI regain leadership the rebalancing outflows are likely to re-emerge against KRW.
Beyond rebalancing dynamics, the outlook for KRW is encouraging. The currency is significantly undervalued (11% undervalued based on deviation from real effective exchange rate trend), and the BOK is poised to start raising rates at its next July 16 meeting.
Meanwhile, the South Korean government confirmed it will unveil its “roadmap for won internationalization” end-July. Monday’s launch of 24-hour onshore KRW trading marked the first major step. Over time, greater international use of KRW should increase underlying demand for the currency.
POLAND
National Bank of Poland (NBP) is widely expected to keep the policy rate unchanged at 3.75% for a fourth straight meeting today. NBP will also publish updated inflation and GDP projection that will offer insights on the policy path.
NBP delivered 200bps of cuts in the past year and the swaps curve implies a 25bps hike to 4.00% in the next twelve months. Poland’s positive real rates and favorable balance of payments backdrop continue to underpin PLN.
