ING FX Daily
Yesterday was a rough session for risk sentiment, as global equities sold off on a combination of higher oil prices and Al-related concerns. FX moves confirmed that the dollar is far from the preferred safe haven at this stage, with the yen and Swiss franc emerging as the main beneficiaries of the defensive rotation. Crucially, the negative correlation between bonds and equities is reasserting itself, and FX markets are taking their cues from that dynamic. lOyr Treasuries broke back below 5.0% for the first time in a month, showing ever-reduced sensitivity to higher oil prices. The same dynamic is visible at the front end, where the 2yr SOFR swap rate dropped 15bp to 4.50% yesterday. That suggests equity jitters are enough to dent market conviction on a large Still, the bar for pricing out a December Fed hike appears fairly high, which should prevent larger USD corrections for the moment. Any stabilisation in risk sentiment can help USD consolidate across most pairs and take some shine off JPY and CHF. But the FX reaction function to further risk sell-offs is now looking much clearer. On the data side, focus will be on S&P Global PMIs today. Consensus is for some softening in the U
Yesterday was a rough session for risk sentiment, as global equities sold off on a combination of higher oil prices and Al-related concerns. FX moves confirmed that the dollar is far from the preferred safe haven at this stage, with the yen and Swiss franc emerging as the main beneficiaries of the defensive rotation. Crucially, the negative correlation between bonds and equities is reasserting itself, and FX markets are taking their cues from that dynamic. lOyr Treasuries broke back below 5.0% for the first time in a month, showing ever-reduced sensitivity to higher oil prices.
The same dynamic is visible at the front end, where the 2yr SOFR swap rate dropped 15bp to 4.50% yesterday. That suggests equity jitters are enough to dent market conviction on a large Still, the bar for pricing out a December Fed hike appears fairly high, which should prevent larger USD corrections for the moment. Any stabilisation in risk sentiment can help USD consolidate across most pairs and take some shine off JPY and CHF. But the FX reaction function to further risk sell-offs is now looking much clearer.
On the data side, focus will be on S&P Global PMIs today. Consensus is for some softening in the US figures, which, however, remain deep into expansionary territory. The OAT-Bund lOyr spread closed at 174bp after touching 178bp yesterday. That wasn't the only EU sovereign spread widening yesterday; bunds outperformed (+9bp) on haven demand, and energy prices played a role too.
But OATs saw the only increase in lOyr yields in Europe (+6bp), and the OAT-BTP spread has reached a grim 50bp milestone. The budget/political situation is not visibly deteriorating, so the move is probably a function of OAT's simply having a higher beta to global factors and perhaps some concerns about another weekend of social unrest in France. The euro’s sensitivity to France has clearly diminished, with the common currency not materially underperforming G10 peers yesterday. That link may, however, re-establish very rapidly should a new pain level - perhaps 200bp - be breached.
We aren’t expecting that much further widening for now, but the risks are clearly there, and the euro remains rather unattractive across the board. EUR/CHF remains the cleanest way to play European sovereign risk at the moment, while EUR/USD should be quick to re-test the 1.1120 14 October low should bond turmoil persist. Today’s PMIs will probably play a secondary role to France, which faces a Moody’s credit review, and global equities. Expectations are for slightly softer numbers compared to September.
The end of the week offers little in the regional calendar, with the primary driver remaining the broader global narrative. Deepening "risk-off' sentiment and the continued rise in energy prices are weighing on emerging market currencies, including those in CEE. Nevertheless, the region is demonstrating admirable resilience; despite some fluctuations in rates, the FX market remains relatively robust. Even so, we maintain a bearish outlook on CEE currencies in general.