FX Daily: Looming Payrolls Can Keep FX Volatility In Check

(MENAFN- ING) USD: Wait-and-see mood can dominate today

News of a deal between Iran and Oman to open a safe shipping route in the Strait of Hormuz has kept the FX market in risk-on mode, favouring a rotation from the dollar to higher-beta currencies. Even so, G10 moves have been contained this week, likely because tomorrow's US payrolls report remains the key catalyst and a notoriously difficult one to predict.

That caution is evident in rate pricing. Expectations for upcoming Fed meetings are little changed since July's announcement, with 14-17bp consistently priced for September and 30-35bp for December. This has come during a week in which Brent fell $15/bbl: a clear testament that US rate expectations are currently being driven far more by data and Fed communication than by energy prices. On the latter, Daly, Cook and Kashkari all delivered some hawkish-leaning comments yesterday.

Speaking of data, ADP payrolls came in a bit soft at 44k and ISM services rose less than expected to 54.1 yesterday. The services employment subindex plummeted to 47.5, which – according to our macro team – points to some mild downside risks for tomorrow's payrolls.

Markets are also waiting for the next headlines on US-Iran negotiations. There appears to be little pessimism left in FX markets, and positive headlines on that topic may not generate sustainable USD weakness. With payrolls looming tomorrow, a wait-and-see stance may keep volatility contained and the dollar broadly range-bound.

Francesco Pesole

EUR: Well supported

EUR/USD has been retesting the 1.1550-1.1560 resistance area, supported by a softer dollar and the solid defence of 1.1500 earlier this week. Still, we do not see a fundamental catalyst for a break higher unless US data disappoint tomorrow. As discussed above, the decline in oil prices is not feeding through to lower US front-end rates, leaving economic data as the key driver needed to sustain further gains in the pair.

With no real input from the eurozone, we are neutral on EUR/USD today. The pair can stabilise in the 1.1530-1.1550 area ahead of tomorrow's US payrolls report.

Francesco Pesole

SEK: Hotter core inflation not enough for hikes

Sweden's CPIF excluding energy surprisingly accelerated from 0.4% to 0.6% in July. The headline figure slowed as expected from 1.3% to 0.7%. The slightly hot print in core has prompted a small positive reaction in SEK this morning. However, markets were already fully pricing in a Riksbank hike by year-end, which limited the upside for front-end SEK rates.

Even after adjusting for the temporary tax measures that are artificially suppressing prices, the inflation outlook does not look strong enough to justify such firm market conviction on Riksbank tightening. We recognise that hawkish risks have edged higher, but our baseline view remains unchanged: no hikes before year-end. In turn, we continue to see a relatively shallow path for EUR/SEK and target 10.80 by year-end.

Francesco Pesole

CZK: CNB guidance likely to be less hawkish than market pricing

July inflation brought little surprise, rising from 1.5% to 1.7% YoY. Lower food prices partly offset higher fuel prices, while services inflation picked up again to 4.7% YoY from 4.5% in June. We estimate core inflation was broadly unchanged at around 2.8-2.9%. Overall, the latest inflation print should have limited implications for today's CNB meeting.

We expect the CNB to keep rates unchanged at 3.75% at its first meeting after the June hike, which made it the only central bank in the CEE region to tighten. Focus will be on the governor's forward guidance and the new CNB forecast. We expect downward revisions to GDP, slightly lower headline inflation and a lower EUR/CZK path, while stronger wages, higher EUR rates and eurozone PPI should point to a more meaningful upward revision elsewhere. Overall, the picture should be mixed, but relative to current market pricing, the meeting should lean dovish. Despite the recent rates rally across the region, the Czech curve still prices two hikes, the most in EMEA. The governor is likely to keep the door open to one more hike, but this should still be more dovish than what markets currently price.

The Czech koruna has lagged CEE peers in the latest global relief rally, reflecting its stronger link to rates than elsewhere in the region and lower beta. In our view, market pricing of further tightening should keep the CZK on the weaker side, with EUR/CZK likely to trade around the 24.20–24.25 range.

Frantisek Taborsky

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