Euro headed up to 1.23 USD medium-term
By Yann Quelenn
Despite higher US interest rates at the front-end of the yield curve, the Euro is likely to keep rising against the Greenback. The American economy is weaker than many believe, and investors are keen to unwind their long dollar positions. Most of all, the EU economy is looking stronger than expected.
Today’s data release on July balance of payments showed that capital inflows pushed the EU’s current account balance to €8.625 billion from €5.257 billion. This capital is riding expectations that the European Central Bank will starts tightening money at its next monetary policy meeting, on 26 October. ECB policy of the past few years has pushed money towards global bonds, buoying their prices. As the ECB tapers, investors will unwind foreign assets and bring money back to the Eurozone.
US yields stabilise, while USD slips
By Arnaud Masset
Ahead of today’s meeting of the US Federal Reserve’s Open Market Committee, American interest rates are holding steady after a run up, while the US dollar is sliding.
Expectations are that at tomorrow’s media briefing, the Fed will reveal no change to interest rates. Nonetheless, investors are hoping that the central bank will reveal the timing of its long-awaited balance sheet runoff. General expectations are that this will start in October or December, but even this is uncertain. Clearly, the bankers are cautious about triggering a sell-off in bonds that would spark a yield-surge that in turn could spike the economy.
US rates have soared recently. The monetary-policy-sensitive 2-year yield rose more than 12 basis points since 8 September, stabilising just under 1.40% on Tuesday morning. Similarly, 5-year and 10-year yields consolidated gains after a rally of 0.21 bps and 0.22 bps, respectively. This was little help to the US dollar, which fell more than 0.20% against the Euro and around 0.30% against the Aussie and the Kiwi.
Asia is spicy
By Peter Rosenstreich
The Hong Kong dollar plunged briefly, after the region’s Monetary Authority sucked liquidity out of the system by offering $HK 40 billion in exchange bills. The market was caught short $HK, a leading currency in carry trades. However, fundamentals will likely move the $HK back from around 7.805 to its previous zone of 7.82 USD.
Japan’s Prime Minister Shinzo Abe has confirmed that snap elections are under consideration – a proposed date is 22 October. Abe’s popularity has risen, as the public worries about a North Korean threat have climbed and the opposition Democratic Party continues in disarray. If Abe wins, Abenomics will surely carry on. Look for the USD/JPY to rally to 111.70.