FX Daily: No Quick Fix

(MENAFN- ING) USD: Ongoing uncertainty keeps the dollar bid

After a day of reprieve yesterday, it looks as though risk assets will come under pressure again today. Investors may now be concluding that a swift resolution in the Middle East is unlikely, as reports suggesting an early negotiated settlement or US efforts to reopen the Straits of Hormuz amid an ongoing conflict appear premature. Crude oil remains near this week's high at $84/85, and European natural gas has opened up 10% in early Europe. Adding to the rebound in gas has been reports that Russia could redirect its gas exports away from the EU. As ING's commodities strategist, Warren Patterson discusses here, Russia represents 12% of the EU's gas imports. The EU is trying to wean itself off Russian gas, but clearly events in the Middle East make such a move that much more arduous.

In addition, we are starting to see more frequent headlines about the US private credit space and, in particular, the redemptions coming from business development company (BDCs). These are investment companies targeted at wealthy retail investors looking for alternative investment strategies. Funds raised are traditionally invested in SMEs. Some high-profile BDCs, such as those of Blue Owl and Blackstone, are currently seeing heavy redemptions as investors fear that their funds have been used to fund the AI boom for some of the software companies. Market focus is now on the size of any further redemptions, where BDCs get 'gated' or redemptions halted, and whether the BDCs need to sell illiquid investments to meet redemptions. Certainly a watch factor for markets and a very different financial risk to the more macro energy supply shock developing in the Middle East.

China will also not be bailing out the global economy with renewed fiscal stimulus. Its latest economic plans focus on higher quality, but lower growth levels. And bond issuance plans will remain the same. So, no reprieve to procyclical or EM currencies from this news.

Turning back to the US, last night's release of the Fed's Beige Book ahead of the 18 March FOMC meeting gave a picture. Growth seems mixed/subdued, as did the labour market. There was some suggestion that companies could be ready to pass on tariff costs to the consumer, but doubts about whether consumers, especially lower-income consumers, could handle it. For today in the US, we have Challenger job cuts, initial claims and import prices. The job cuts data should be in focus after a large rise in January.

Given much uncertainty, we suspect the dollar can edge towards the top of recent ranges today. The market will remain transfixed by European natural gas prices and assuming that these push higher again today, DXY can probably edge back towards the 99.40/50 area.

Chris Turner

EUR: Little support in the short term

EUR/USD remains fragile as energy turns bid again. Another soft day for equities, where Europe underperforms the US, could see EUR/USD back at the 1.1530/50 area. The only positive we see today would be if the US Challenger job cut data surprises on the upside again, and the dollar gets hit as concern grows about the US labour market.

We have a few speakers from the ECB today, including Luis de Guindos, Olli Rehn and Christine Lagarde late in the day giving the Annual Global Risk Lecture. High energy prices have seen short-dated yields spike again today – but this is a global and not just a eurozone phenomenon. With growth prospects under pressure, we can see EUR/USD staying offered until this energy crisis is resolved.

Chris Turner

GBP: Short term outperformance

Dollar strength has dominated this week, but sterling has outperformed the euro. The biggest drop in EUR/GBP came on Tuesday during a broad deleveraging phase in the market. We attribute this sterling outperformance to positioning, where asset managers have been (and still are) running large net short sterling positions, while at the same time running long euro positions. Equally, the re-pricing at the short end of the interest rate curve as the market prices out Bank of England easing has helped sterling too.

Our UK economist, James Smith, is pushing back his forecast of the next BoE rate cut to April from March. But he retains two BoE rate cuts this year, which should still mean EUR/GBP trades at 0.88+. Additionally, sterling looks poorly placed should bond markets come under pressure again. One scenario here is that high energy prices curtail or reverse monetary easing cycles, populist governments renew energy subsidies and bond markets get hit. This was the scenario in 2022 which prompted the gilt crisis later in the year.

Chris Turner

PLN: Fearless central bank continues rate cuts

The National Bank of Poland cut rates by 25bp to 3.75% yesterday despite the current global volatility. Although the statement highlighted global uncertainties for inflation, the market was hard-pressed to find any signs of hawkishness. The new forecast shows inflation close to the central bank's target in 2028, while GDP growth remains strong. Still, we expect Governor Adam Glapinski's press conference today to be rather hawkish given the uncertain energy prices.

The zloty saw some recovery yesterday, as did the rest of the region and global markets. Looking at rates after the decision, it seems that the market is not paying much attention to the central bank's meeting in these conditions. Still, the rate cut is a dovish signal to us that the NBP is not afraid of further rate cuts, although our terminal rate call to 3.25% may still be at risk.

The market dismantled one rate cut bet during the global sell-off and the priced in terminal rate has moved to around 3.50%. A hawkish press conference might not have much of an impact on the market, while a dovish side is a risk for the market at the moment. However, EUR/PLN should still see some downside below 4.260 in an environment of renewed sentiment, unless we see a new escalation of the US-Iran conflict.

Frantisek Taborsky

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