Major Overnight Headlines
• INR touches another record low versus the USD in London trading; tone remains mildly “risk-off”
• BoJ’s Kuroda says will adjust policy “if downside risks increase”, Thomson Reuters
• UK PSCNR at -19.6B in July versus -8.7B expected although PSNB ex-interventions at 0.1B (-2.9B exp.)
• ECB in Athens as third-bailout talk heats up, Thomson Reuters
Days like today, so far, remind us of what the “new breed” of “risk-off” looks like: developing market weakness, equity market weakness and a general rise in sovereign debt yields We’ve been here before, just not really in July or most of August. The bulk of activity this morning in FX and rates in part appeared to be retracement from yesterday’s illiquid price action, whilst some of the moves also suggested a degree of pre-FOMC minutes positioning.
There is probably a multitude of non-macro factors which caused the sharp move higher in EUR/USD on Tuesday, so the retracement this morning is not hard to justify, but the modest move lower in the pair today taken alongside weakness in the commodity currency and equity spaces is an important reminder that there is an important “growth” trade attached Fed QE. This trade is positive for demand and the aforementioned spaces when Fed balance sheet expansion rate rises, and it’s negative for them when Fed balance sheet expansion rate falls. Earlier episodes of bond market volatility have not managed to drag the EUR lower in a sustainable way yet because they’ve not been large enough, rapid enough or persistent enough. The defence barrier created by the ECB’s promise to execute OMTs last year is still incredibly thick. Still, when other FX flows fade away, a slowing of Fed balance sheet expansion is a net negative for the EUR.
Read the full report: FX Daily
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