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  • richard evans

Central banks take centre stage

Good morning

We return from the long weekend to see USD still supported if slightly off its recent highs. Overnight Asian markets were generally higher following a positive start to the week from US stocks yesterday.

Minutes from RBA overnight showed there had been a discussion about whether to raise rates 25bps rather than the 50bps move it actually decided upon. There was also a mention that rates were getting closer to normal. AUDUSD a few points off its overnight highs at 0.6725 but AUDNZD has moved above 1.1300, reaching levels not seen since March 2016. GBPAUD meanwhile sits at 1.7025 after finding some support around 1.6975.

Of course, the main event this week will be the Fed rate announcement tomorrow. So far a 75bps move higher has been priced in, the key question is whether they push for a full 1% increase. At the moment a 1% rise does not look the most likely and failure by Fed to surprise markets could see a bit of a USD sell-off.

The Fed announcement is followed on Thursday by our own central bank rate decision. Another 50bps rise is expected, whether this is enough to offer any support to the beleaguered pound remains to be seen although I note that since the Russian invasion of Ukraine, GBP has weakened after each of the four BoE meetings we have had. GBP would initially strengthen after a rate rise but slip lower after half an hour or so.

GBPUSD currently 1.1450 as I type. Volatility levels are high, a Thursday expiry 1.1400 GBPUSD put costs 60$ pips, or $6,000 per GBP1m notional. Possibly money well spent but I’ll look to see if I can find something a little cheaper. Might have to wait post-FOMC to see if we do get any USD weakness.

We do also have the latest BoJ rate announcement this week. No change is expected although after a stronger CPI print from Japan overnight it is possible we see a slightly less dovish statement, which in turn could lead to some yen strength. USDJPY now 143.50, not fasr off the middle of the 141.50 145.00 range we have seen since early Sept. Downside USDJPY perhaps?

So, putting the two ideas above together, I guess I am looking at GBPJPY downside going into the end of the week. With spot now 164.00, it is tricky to find any cheap downside options, the Friday expiry 163.00 put already costs 75 yen pips, 750,000 yen per £1m notional, around $5250. Again, it’s a bit too expensive for the time being and the downside USDJPY is a bit less certain in my mind. Back to the drawing board.

In China, CNY is weaker, with USDCNY fixing at 6.9468, higher since August 2020, but this still doesn’t seem to reflect real levels, with USDCNY trading above 7.00.

That all for now. I hope you all enjoyed your long weekend. I was more drawn to the Queens funeral than I thought I would be. The splendour of the occasion was quite incredible, an event said to have been watched by an incredible 4 billion people around the world. I have to say, we did it well. RIP Queen Elizabeth, your service to your country is something we are unlikely to witness again.

- 13.30 US building permits, housing starts

- 13.30 CAD CPI

- 18.00 ECBs Lagarde speaks

- 20.30 BoCs Beaudry speaks

- 03.00 RBAs Bullock speaks

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