Sunset Market Commentary – Forex Action



The Bank of England has provided an update on its temporary and targeted intervention in the long-term UK gilt market. Since Wednesday, September 28, he has offered to buy up to £5bn of bonds daily to restore market functioning and reduce the risk of contagion to credit conditions for UK households and businesses. They were forced to intervene after lavish budget spending plans in a mini budget were announced by UK Chancellor Kwarteng. Bond purchases would cease on October 14. So far the BoE has spent £5bn out of a maximum of £40bn. Therefore, they are ready to deploy unused capacity if needed this week. Second, the BoE launches an extended temporary collateral repo facility (TECRF; until 10 November) enable banks to help alleviate the liquidity pressures faced by their clients’ LDI funds through liquidity assurance operations (more collateral acceptable than under the Sterling Monetary Framework). Other liquidity enhancement facilities include long-term repo transactions and short-term repo facility. In other related news, UK Chancellor Kwarteng has said he will present his medium-term fiscal strategy with forecasts endorsed by Britain’s fiscal watchdog on October 31 instead of November 23. This allows the Bank of England to take them fully into account at its next meeting on November 3. Today’s announcement didn’t help stop the rot in the gilt market. UK sovereign yields gained 10 to 17 basis points across the curve, with the very long end underperforming. Britain’s 30-year yield rose above 4.5% for the first time since buying began last month. Sterling manages to keep its cool against a rather weak euro the pair nowhere approaching the EUR/GBP of 0.8775.

Trading in other markets is occurring in lower volumes as US investors are absent for Columbus Day. The ecological calendars are blank. European stock markets opened badly against the United States on Friday and against Asia this morning. Russian retaliation against Ukraine surprisingly did not add to the grim atmosphere. On the contrary, most exchanges managed to erase opening losses to currently trade flat on the day. EUR/USD always respects the laws of gravity with with the pair dropping the big 0.97 figure. End of September low stands at 0.9536. The German yield curve is steepening with yields falling 3 basis points upstream and rising as much as 5 basis points at the very long end. We take back comments from hawkish Dutch ECB Governor Knot, who argued for at least two more significant rate hikes while adding that he doesn’t expect QT to start until 2023.

News headlines

Norwegian inflation accelerated considerably in September. Listed prices rose 1.4% m/m, twice the pace expected, to be higher 6.9% y/y (against 6.2%). The Norges Bank had garnered 6%. Core inflation stood at 1% m/m and a record 5.3% on an annual basis. The Norwegian krone fell from 10.44 EUR/NOK to 10.36 currently and Norwegian swap yields add up to 10 basis points to the front of the curve. At the last meeting, Norges Bank rose 50 basis points to 2.25%. He added that a more gradual approach (i.e. 25 basis point moves) might be appropriate for the policy going forward. Markets strongly doubt New Brunswick’s ability to slow the pace of tightening and question the projected terminal rate of 3% “during the winter”. Current market prices suggest a maximum policy rate of 3.75/3.5%.

The Hungarian forint fell to a new record low against the euro (and the dollar). EUR/HUF jumps a significant 5 digits to 427.78 after Hungary revealed its the trade deficit widened to 1.3 billion euros in August, most important since the introduction of the euro. This is part of a twin deficit, with government budget shortages also hitting a record HUF 2.7 billion in the January-September period. Soaring energy prices and continued HUF weakness are likely to worsen both deficits in the coming months. The figures put Prime Minister Orban’s Hungary in a difficult situation and are increasing pressure to phase out several costly spending measures, including price caps on fuel, food and home energy. Other EC currencies (Polish Zloty, Czech Koruna) are also under pressure in today’s risk aversion session, but the losses are less dramatic.


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