The dollar and euro have mixed performance against their G10 peers



FOMC member Bullard joins hawkish parade launched by Daly, Mester and Evans yesterday. This morning he reiterated his views on a key rate at 3.75-4% by the end of the year and says it is necessary to enter more restrictive territory. During the first American transactions, he doubled down in another speech, saying rates may need to be higher for longer to dampen inflation. It’s a sneer at money market prices in rate cuts as early as the first quarter of next year. We look forward to the remaining wave of speakers scheduled for today. The myriad of recent comments from the Fed in any case is currently forcing bond markets to rethink their extremely dovish repositioning during June and July. After yesterday’s impressive bearish flattening, US yields extend their rebound north today. Changes go from 2.1 bps over 30 years to 4.7 bps over 2 years with Fed rate hike expectations change mostly for 2023 (i.e. the pricing of rate cuts). The 10-year yield adds 2.5 basis points to be a bit more comfortable above the 2.70/72% support zone. German Bunds underperform as they catch up with USTs after extending their decline after yesterday’s European close. The bearish curve is also flattening, showing gains of 2.4bps (30yrs) to 6.1bps (2yrs/5yrs). European swap yields also have a decent run, rising 4.2 to 4.6 basis points at the front end of the curve. The 10-year yield, much like Germany, is finding its way back up into the downtrend channel. The current yield development is also supported by commodity prices with prices like oil rising (see headline below) and – perhaps – with some of the geopolitical tensions easing after Pelosi left Taiwan and a harsh Chinese response so far remains absent. Stock markets are holding up well. Yields on core bonds are rising, but orderly fashion is allowing the general risk mood to prevail for risky assets. US stocks open with gains ranging from 0.4% (DJI) to 0.8% (Nasdaq). The Eurostoxx50 gained 0.70%.

Foreign exchange markets are trading relatively calmly. The dollar and euro had mixed performance against their G10 peers. Put against each other, EUR/USD goes nowhere around 1.017 as a result. The pair attempted to recoup some of yesterday’s losses, but they evaporated as today’s session progressed. The trade-weighted USD (DXY) looked to extend yesterday’s rally past the 105 barrier, but the move quickly ran into resistance. It is now holding around Tuesday’s close at 106.22. The Japanese yen took a breather after its recent surge. Rising core bond yields help USD/JPY and EUR/JPY rise to the 133.65 and 135.92 area respectively. Some nervousness is creeping into the pound ahead of the BoE’s monetary policy meeting tomorrow. The influential NIESR think tank has painted a grim picture of the UK economy, already calling it a recession with a stagflationary outlook, and likely weighed on the British currency as well. EUR/GBP gains to 0.837. Cable (GBP/USD) is stabilizing around 1.215.

News headlines

Turkish inflation hits a new 24-year high as prices rose 2.37m/m to 79.60% year-on-year the July figure was even weighed down by a monthly fall in transport costs (-0.87% m/m). That’s an acceleration from last month’s 78.62% and only slightly below the 80.24% expected by analysts. Core inflation accelerated from 57.26% to 61.69% y/y. Pricing pressures in Turkey are believed to have yet to peak with the country’s central bank holding rates at a far too low key rate of 14%. With such negative real rates, it is continues to support growth and therefore inflation. Instead, Turkish authorities are relying on macroprudential measures, but without much success so far. The Turkish lira is losing ground against the euro (EUR/TRY 18.30) and the dollar (USD/TRY tending towards 18).

OPEC+ has agreed to a minor and rather symbolic increase in production for September at their meeting today, the delegates said. An additional amount of 100,000 barrels/day would hit markets after the oil cartel accelerated the reversal of their Covid-era production curbs in July and August. The small exit bump is designed maintain a balance between consumers suffering from high energy prices and the imminent threat of a recession in regions like the US and Europe that could undermine demand hard and fast. There have been no discussions about whether to continue ramping up production beyond September. Oil prices rose after the meeting. Brent oil is trading at $101.75/barrel.


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