Euro expected to rise amid ECB and Fed uncertainty, Asia FX holds steady

Key Takeaways

• Short-dated yields in focus ahead of US CPI
• Rates-sensitive real estate and economy-driven industries hit hard
• Euro looks set to rise against crosses and possibly against the dollar
• Asia FX holding up, but wary of currencies with high beta to US equities

After yesterday’s monster moves, short-dated yields are the key focus in fixed income ahead of today’s US CPI.

However, looking more closely, credit assets and economy-sensitive securities have come under immense pressure even as long-duration assets have attempted to rally.

Expectations for ECB to Maintain Course

Today’s US inflation report and other key economic indicators throughout the week will likely be vital in assessing whether the Fed may hike at its meeting next week. Hence, no time for complacency on the Fed watch

In equities, traders are keying on rates-sensitive real estate amidst various signs that commercial property has come under strain recently. Second to this are economy-driven industries, materials, and energy as real economy funding concerns build.

While expectations for Fed hiking have become significantly more uncertain, the EURUSD staying bid suggests traders expect the ECB will likely stay on the path at least for this week and possibly for a while longer. As a result, the Euro looks well-positioned to move higher over the coming weeks – especially against crosses (e.g. SEK and GBP) – but also against the Dollar if the Fed pauses.

THB Stands out Among These Currencies

Asia FX is holding up relatively well, but traders turned wary of currencies with high beta to US equities and susceptibility to USD funding stress. On the other hand, currencies with high beta to China’s domestic demand could be a relatively safe bet where THB stands out.

On the back of the conservative NPC growth target and lack of solid stimuli will likely keep the market cautious about the CNH and China’s recovery, particularly given the slow pick up in the property sector and worsening geopolitical risk, at least until the data proves otherwise.