Credit Agricole

Asia overnight

Risk sentiment continued improving overnight with risky assets and most risk[1]correlated currencies extending their recovery that started in the wake of the FOMC meeting yesterday. Further recovery of Chinese technology stocks as well as persisting hopes for a resolution of the crisis in Ukraine further added impetus to the correction higher in risk sentiment. The USD remained largely on the back[1]foot throughout. The updated Fed ‘dot plot’ endorsed the seven rate hikes the markets were expecting this year ahead of the meeting and further pushed against the rate cuts priced in for 2024. That being said, the UST yield curve flattened further (using UST 2s10s) in the wake of the policy meeting suggesting that investors continue to worry that too aggressive Fed tightening could hurt the US economic outlook and thus erode the appeal of the USD as an investment currency. Indeed, history shows that the flatter the UST yield curve, the weaker the positive correlation between the USD and the US rate expectations can become from here.

Citi

European Open

Post-FOMC shuffling continue during Asia hours with KRW the star of the show, rallying the most in two-years, with tech-FX surging as stocks rebound sharply as risks of a hawkish Fed shock and continued weakness in China stocks quickly dissipate. TWD pushed higher through the day with stock inflows appearing to provide a key boost as Kospi, Taiex and Hang Seng all rallied sharply. Treasuries also surged as Asia investors came off the sides line after Fed to scoop up bonds in the higher yield/wider credit environment. G10 FX was subdued overall. AUD gained after a solid employment report, SEK struggled as some of Wednesday’s blistering rally, driving by hawkish Riksbank comments, gets pared. GBP is supported with volumes high and leverage buying seen ahead of BoE decision, where a larger hike remains priced as a non-negligible risk. BRL central banks also hikes 100bps as expected.

Looking ahead, BoE appears likely to hike 25bps on the heels of the FOMC, with IDR, HUF and TWD rate decisions also due. We also see some ECB speakers with key focus on President Lagarde and Chief Economist Lane.

BOE Preview

Ahead of today’s BoE rate decision, leverage players have showed up as better buyers in GBP, according to our eTrading team, where activity is running around 40% above recent averages. We note that a 25bps hike is fully priced with around a 30% chance of a 50bps increase baked into markets, as of Thursday’s close.

–Despite a worsening medium-term outlook, Citi Economics expects the MPC’s prescription to remain the same – with a majority continuing to back a further hike to Bank Rate and frontloaded withdrawal of monetary stimulus.