EUR momentum builds as China steps lift global growth optimism

EUR: Set to break through highs

The initial FX response to the larger 50bp rate cut by the FOMC last week was mixed with the dollar strengthening versus the yen and even on a DXY basis through to Monday. But that strength has given way with the DXY index yesterday hitting a new closing low not seen since July last year and extending further this morning. Since the closing level the day before the FOMC announcement the yen is still trading at weaker levels, just, while the euro and the Swiss franc are lagging behind the rest of G10, recording the smallest gains (0.7%).

This is your standard type of G10 FX performance during periods of risk-on – the low-yielders underperform relative to the higher-beta, higher yielders. NZD is currently the top performing G10 currency since last Tuesday’s close. But the euro could be about to break a key level that would likely prompt some further buying. The 1.1200-level has now been hit three times in August and September and a break could see a move extend to test the high from last year at 1.1276. Increased global growth optimism will help and the stimulus measures announced by China will certainly add to US dollar selling momentum. China’s equity markets advanced further today and whether the announced measures will prove sufficient to improve confidence on a sustainable basis remains unclear but there is certainly a new urgency which if coupled with a larger than expected fiscal stimulus package to support Chinese consumers could prove more sustainable in lifting investor optimism over growth in China. That would help fuel expectations of a potential greater divergence between the US and the rest of the world. The consumer confidence data from the US yesterday was much weaker than expected with the ‘jobs plentiful minus jobs hard to get’ index falling to a new low not seen since the covid period in March 2021.

We are also not yet convinced on the potential for a pick-up in rate cuts from the ECB. The second half of the ECB’s tightening cycle post covid was throughout a period of near recessionary conditions in the euro-zone due to the scale of the energy price shock that hit real incomes and consumer spending. That didn’t stop the ECB tightening and until underlying inflation is back closer to target the risk is that the ECB continues for now with a more cautious approach to monetary easing even in circumstances of weaker than expected growth.

ROLLING 30-DAY CORRELATION OF DAILY % CHANGE IN EUR & CNY ON A 30-DAY MOVING AVERAGE

Source: Bloomberg, Macrobond & MUFG GMR

SEK: Riksbank set to cut again  

 The Swedish krona is the 3^rd best performing G10 currency so far in September with the strong revival in risk appetite helping to fuel SEK buying. The Riksbank is very likely to announce a 25bp cut today, taking the key policy rate to 3.25%. A cut today would be the third in the cycle but still just 75bps of unwind of the 450bps of hikes that started back in 2018 when the Riksbank first raised rates from -0.50%. The Swedish economy has been therefore coping with the gradual removal of monetary stimulus for longer than most other major countries. Following the post-covid inevitable economic rebound, the economy has suffered. In the last ten quarters through to Q2, Sweden’s GDP has contracted on five occasions underlining the weakness of the economy. The economy contracted by 0.1% in 2023 but is set to expand by about 0.5%. The consensus is for growth to rebound to 1.9% in 2025.

In the Riksbank monetary policy report in August the guidance was clear – that “the policy rate can be cut two or three times before the end of the year” if the inflation outlook remains favourable. Since then we have had one inflation reading with the headline and CPIF rates coming in weaker than expected while the CPIF excluding energy was in line with expectations at 2.2%. So there is no reason today for the Riksbank to alter that guidance. Still, the OIS pricing implies that market expectations is for the potential for a 50bp cut today although that probability is just 20%. By year-end there is 10bps more than implied by three 25bp cuts so if the Riksbank today keeps the message the same, there may be some modest disappointment that could lift front-end rates and help SEK.

We expect a 25bp cut and for guidance to remain similar. The Riksbank possibly will have some concerns over SEK performance going forward in circumstances of increased financial market volatility as the US economy slows and as we enter the period around the US elections. SEK remains a high-beta G10 currency and is vulnerable to broader risk conditions and therefore a cautious message today makes sense to us. In addition, the PMI data does point to improving economic conditions going forward. As long as risk conditions remain stable, a 25bp cut with a cautious communication should provide scope for further near-term SEK gains. 

POSITIVE RISK BACKDROP AS IMPORTANT FOR SEK OUTLOOK AS RIKSBANK DECISION

Source: Bloomberg, Macrobond & MUFG GMR

KEY RELEASES AND EVENTS

Country	BST	Indicator/Event	Period	Consensus	Previous	Mkt Moving
SZ	08:00	KOF Leading Indicators	Sep	102.0	101.6	!
SZ	09:00	ZEW Expectations	Sep	--	-3.4	!
US	12:00	MBA Mortgage Applications (WoW)	--	--	14.2%	!
US	13:30	Building Permits (MoM)	Aug	4.9%	-3.3%	!
US	13:30	Building Permits	Aug	1.475M	1.406M	!!
EC	13:30	ECB McCaul Speaks	--	--	--	!!
US	15:00	New Home Sales	Aug	699K	739K	!!!
US	15:00	New Home Sales (MoM)	Aug	--	10.6%	!!
US	18:00	5-Year Note Auction	--	--	3.645%	!!
US	21:00	FOMC Member Kugler Speaks	--	--	--	!

Source: Bloomberg