FX Daily: An unexpected perfect storm for the dollar
USD: Various factors influence the dollar simultaneously
The sudden return of market scrutiny of US regional banks added an unexpected negative factor to the dollar. US equities took a hit yesterday, with the S&P500 regional bank sub-index plunging 5% after two lenders (Zions and Western Alliance Bancorp) reported fraud-related loan problems. The contagion to other risk assets suggests not only that the market remains sensitive to regional bank concerns (which are a legacy of SVB’s 2023 collapse), but also potentially to the broader credit market, which has been operating with very tight spreads over the past few months.
Unlike 2023, this time the risks appear more isolated, but they could feed into a narrative that the business environment and credit quality in the US are in worse shape than the data suggests, which may also be due to AI distortions. Expect close monitoring of regional banks’ earnings ahead, with further impact on US stocks prolonging the dollar sell-off.
Stock futures now point to a negative open of 0.4-0.5% for the S&P500 and -0.9% on the Euro Stoxx, as the Nikkei and Hang Seng trade at -1.5% and -1.9% at press time. So far, this does not indicate the relative underperformance of US equities compared to other major markets, but the fact that the source of the selloff is events in the US makes JPY, CHF and EUR the safe-haven destinations of choice.
Also not helping the greenback was news that Trump will meet with Putin in the next few weeks to discuss ending the war in Ukraine. Oil prices fell almost 7% in the last 7 days.
Short-term interest rate differentials are also impacting the dollar, with markets now pricing in 5bp versus 50bp for a Fed rate cut by the end of the year. In a volatile environment like this, it is difficult to determine a bottom for the USD. DXY may need to drop back to 97.50 before finding strong support, unless some encouraging US domestic news could come to the rescue today.
Francesco Pesole
EUR: Eyeing 1.180?
EUR/USD rose again yesterday, but mainly due to USD weakness, as most markets had already priced in that French PM Lecornu would survive the vote of no confidence. As discussed here, Lecornu effectively traded political stability for greater budgetary difficulties by freezing pension reform. This – despite little assurance of the new government’s resilience – kept the 10-year OAT-Bund spread above 75bp, around 10bp wider than mid-August.
However, this is enough for the euro to account for most of the French risk premium, and if there is no collapse of the new government before the end of the year, this will allow EUR/USD to refocus on the canonical market drivers (interest rates and equities).
As discussed above, the dollar remains vulnerable, and a break above 1,750 is possible, with 1,180 starting to look very realistic again. The upcoming meeting between Trump and Putin may also attract positive speculation for the EUR regarding the ceasefire in Ukraine.
Our macro team has published a preview of the Dutch elections (29 October). At the moment we don’t see it as a major risk event for the euro: a fragmented parliament is the most likely outcome, and most parties are unwilling to form a government with Geert Wilders’ Eurosceptic PVV party leading in the polls.
Francesco Pesole
SEK: An unusual winner
The Swedish krona was the second best performing currency this week, rising even higher than the euro due to yesterday’s share sell-off. This sounds a bit strange considering that the SEK usually has a high beta (especially compared to the euro) against risk assets.
But hopes for peace in Ukraine ahead of the new Trump-Putin meeting and crude oil sales clearly helped the krona. Coincidentally, Swedish investors are generally highly exposed to US stocks and this year we have seen large repatriation flows to Sweden whenever special events in the US impact the stock market. This of course means large purchases of SEK.
We remain cautious about the SEK’s ability to rise further than that, as worsening sentiment in European equities could weigh on the krona later today. But the medium-term outlook remains bullish for the SEK, and its ability to withstand equity shocks like this strengthens our view.
Francesco Pesole
CEE: A good constellation for the region
Yesterday’s PPI figures in the Czech Republic showed some weakness in industrial pricing, while core inflation in Poland remained at 3.2% YoY in September, in line with estimates. Today’s calendar only shows inflation expectations in Türkiye for October and wages in Hungary for August. The latest inflation figures in Türkiye show a surprising positive side, which could be reflected in inflation expectations.
EUR/USD’s rebound provided positive support for CEE currencies, while interest rate markets stabilized somewhat, providing room for further gains. At the same time, markets may again see a higher chance of ending the conflict between Ukraine and Russia, which we think would provide the most benefit to CEE currencies, especially PLN and HUF.
EUR/PLN is moving to the lower end of the 4,245-275 range, and we don’t see enough strength to break it. On the other hand, EUR/HUF has a good chance of continuing to move down, especially with possible support from NBH next week. Thus, we may test 389 in the coming days.
Chris Turner
Source: ING
