Sunset Market Commentary – Action Forex


The Bank of England gave an update on its temporary and targeted intervention in the long term UK Gilt market. Since Wednesday 28 September, it offered to buy up to £5bn of bonds on a daily basis to restore market functioning and reduce risk from contagion to credit conditions for UK households and business. They were forced to intervene after the announcement of lavish fiscal spending plans in a mini budget by UK Chancellor Kwarteng. The bond purchases would cease on October 14. Up until now, the BoE spent £5bn out of a maximum £40bn. Therefore, they are willing to deploy unused capacity in case necessary this week. Secondly, the BoE launches a Temporary Expanded Collateral Repo Facility (TECRF; until November 10) to enable banks to help to ease liquidity pressures facing their client LDI funds through liquidity insurance operations (more collateral acceptable than under the Sterling Monetary Framework). Other liquidity-enhancing facilities include long term repo operations and the short term repo facility. In other related news, UK Chancellor Kwarteng said that he will deliver his medium-term fiscal strategy with forecasts endorsed by the UK budget watchdog on October 31 instead of November 23. That enables the Bank of England to fully take them into account when they meet next on November 3. Today’s announcement didn’t help to stop the rot in the Gilt market. UK sovereign yields added 10 to 17 bps across the curve with the very long end underperforming. The UK 30-yr yield surpassed the 4.5% mark for the first time since the start of the buying operations end last month. Sterling manages to hold its nerve against a rather weak euro with the pair going nowhere near EUR/GBP 0.8775.

Trading on other markets occurs in lower volumes with US investors off for Columbus Day. Eco calendars are blank. European stock markets opened bad in response to the US on Friday and Asia this morning. Russian retaliation against Ukraine surprisingly didn’t add to the grim atmosphere. On the contrary, most bourses managed to erase opening losses to currently trade flat on the day. EUR/USD still abides to the laws of gravity with the pair giving up the 0.97 big figure. The end of September sell-off lows stands at 0.9536. The German yield curve steepens with yields dropping 3 bps at the front end and rising up to 5 bps at the very long end. We retain comments by hawkish Dutch ECB governor Knot who argued in favour of at least two more significant rate hikes while adding that he doesn’t expect QT to start before 2023.

News Headlines

Norwegian inflation quickened considerably in September. Headline prices rose 1.4% m/m, double the pace expected, to be up 6.9% y/y (vs 6.2%). The Norges Bank had penciled in 6%. Core inflation came in at 1% m/m and a record 5.3% on a yearly basis. The Norwegian krone rallied from EUR/NOK 10.44 to 10.36 currently and Norwegian swap yields add up to 10 bps at the front of the curve. At the most recent meeting, the Norges Bank hiked by 50 bps to 2.25%. It added that a more gradual approach (ie 25 bps moves) may be appropriate for policy going forward. Markets highly doubt the NB’s ability to slow down the tightening pace and question the projected terminal rate of 3% “in the course of the winter”. Current market pricing suggests a peak policy rate of 3.75/3.5%.

The Hungarian forint sank to yet another record low vs the euro (and the dollar). EUR/HUF jumps 5 big figures to 427.78 after Hungary revealed its trade gap widened to 1.3bn euros in August, the biggest since the euro was introduced. It’s part of a twin deficit, with government budget shortages also swelling to a record 2.7bn HUF in the January-September period. Soaring energy prices and unrelenting HUF weakness will probably deepen both deficits in coming months. The numbers put PM Orban’s Hungary in a tough spot and heap pressure to phase out several costly spending measures, including price caps on the likes of fuel, food and household energy. Other CE currencies (Polish zloty, Czech crown) are also under pressure during today’s risk-off session but losses are less dramatic.

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