FX Daily: Markets firm up Hassett’s trade

USD: Hassett is playing
The dollar sold off in Asia as news emerged that interviews for the Fed chairman position had been cancelled. In theory, people like Christopher Waller should be meeting with Vice President Vance today. Instead, there is news that President Trump has made up his mind – as he said on Air Force One last weekend. And the president’s choice is likely to be Kevin Hassett, who is currently director of the National Economic Council and whose views are considered most in line with the president’s. Heading into Thanksgiving, betting markets were giving Hassett and Waller odds of about 35% as the next Fed chairs. This week, Hassett’s probability jumps to 85%.

Overnight price action has made a small picture of what we can expect should Hassett succeed Powell become clearer. Given Hassett’s fairly dovish perception, the dollar was slightly weaker across the board, the yield curve showed a slight bullish rise and risk assets were little bid. This could be the dominant theme until next week’s FOMC meeting. Speaking to buy-side consumers recently, some attempted to play down the dollar’s weakness from the effects of Hassett’s announcement, ultimately betting that he would be less dovish or allowed to be dovish given the nature of the FOMC voting process.

In addition to the Hassett news, we have two US data points today. The expectation is that the release of ADP employment data for November will decrease to 10 thousand from 42 thousand previously. This should not reduce the 92% probability associated with the Fed cutting interest rates by 25bp next week. And we’ll also look at the ISM Services numbers for November. The market has the potential to react to the employment component figure which last month was still in contraction territory at 48.

We still think the dollar is not yet fully connected to the recent cut in US short-term interest rates, and a break of the DXY at 99.00 could trigger bearish momentum.

Chris Turner

EUR: Hedging costs decrease
EUR/USD finds bids in Asia after Hassett news. However, behind that, there is some evidence that supports these demonstrations. Weaker energy prices sent the euro zone’s trade rate to its highest level this year and supported the euro zone’s external balance. And perhaps more importantly, hedging costs for eurozone residents wishing to insure against exchange rate losses on US assets have now fallen to 1.85% per year looking at the next three months. It was at 2.40% in July.

While a 55bp drop in hedging costs may not seem like much, it is a big deal for bond investors who typically charge more conservative returns. And for reference, at the end of the second quarter of this year, eurozone investors held about €800 billion of US sovereign debt and another €1.5 trillion of US debt. Therefore, a slight increase in the hedge ratio can generate sufficient dollar supply. Over the next few weeks, we may have to watch for dollar buy-side selling on major currency improvements.

In Europe, the focus remains on Ukraine peace talks. Unsurprisingly, there appeared to be little progress in US-Russian negotiations yesterday. Today’s focus may be on the European Commission’s proposal to use frozen Russian assets to fund Ukraine. Political analysts widely feel that these loans are critical to funding Ukraine’s ability to defend itself beyond the second quarter of next year. Failure to release these funds, either due to Belgium’s reluctance to use assets frozen in Euroclear or due to Hungary’s rejection of further funding for Ukraine, would weaken Ukraine’s negotiating position.

If EUR/USD can break the 1.1655/70 area – perhaps with the help of some weaker US data – we could see a decent move through 1.17. We maintain our year-end target of 1.18.

Chris Turner

PLN: Zloty offers an asymmetric response to unpredictable NBP
The National Bank of Poland is expected to cut interest rates by another 25bp to 4.00% today. After last week’s weakness in inflation and wages, this appears to be the market consensus view. The central bank will work on November forecasts and today’s meeting will only produce the MPC statement. Therefore, the focus is on the words and possible future guidance. However, the main event will be Governor Adam Glapinski’s press conference tomorrow.

After the weak data, the market has again turned in a more dovish direction and is currently pricing in a terminal interest rate of 3.50%. This week, the interest rate market experienced a slight rebound after last week’s increase in core interest rates. Although 3.50% seems to be a fair value according to our estimates, it cannot be denied that as the inflation profile declines, the central bank will also take a more dovish stance. In the past, we have often seen changes in communication terminal rates in the range of 3.00-4.00%. At the same time, we also heard that 4.00% could be the first level to stop the cutting cycle and wait for more data and the impact of the previous move. The market will review these details closely.

We are of the view that PLN is in an asymmetric situation and we are slightly bullish. If the central bank surprises with a dovish direction, this is nothing new for markets, and after last week’s interest rate move, we don’t see much room here and the exchange rate will probably remain unchanged. On the other hand, a hawkish surprise, for example the announcement of a longer pause despite lower inflation figures, would probably lead to a more significant adjustment in interest rates and renewed support for FX.

At the same time, we continue to monitor negotiations between Ukraine and Russia and any progress here would also support the zloty. EUR/PLN is below the usual range of 4,230-270 but as we discussed here in previous days, conditions suggest that we could see a break of the lower boundary and test 4,220 again.

Frantisek Taborsky

Asia: Mixed news
Asian FX ended the year with some volatility. USD/INR has pushed above the 90 area as lack of a US trade deal weighs. Presumably, there will be a lot of focus on the external balance to see whether the shift away from Russian crude oil imports has increased energy bills significantly. In our view on the currency, we feel that the rupee will strengthen again, but clearly the delay in the trade deal with the US is taking a toll.

Elsewhere, we see USD/CNH continuing to weaken. This has been happening even before the dollar weakened. We are not sure whether this is related to the influx of foreign portfolios into China or simply Chinese exporters finally offloading their export earnings. However local authorities have controlled USD/CNY completely this year and have clearly allowed this renminbi appreciation. In this case, we think they may prefer a stronger CNY to support domestic demand, as they move away from their long-held export model. Our team expects USD/CNY to fall to the 6.90 area next year.

Chris Turner
Source: ING