FX Daily: Two Kevins, one spot

A few headlines emerged from President Trump’s CNBC interview yesterday. First, Treasury Secretary Scott Bessent is off the shortlist to replace Federal Reserve Chair Jay Powell. Trump pointed to four frontrunners - Kevin Warsh and Kevin Hassett by name, with Chris Waller and David Malpass possibly rounding out the group. Betting websites currently place Hassett slightly ahead of Warsh. Trump hinted that the new chairman might be announced soon to replace resigning member Adriana Kugler, rather than waiting until January. Trump’s open attacks on the Bureau of Labor Statistics over payroll revisions have not had much market impact, but it will be interesting to see whether the selected Fed chair candidate echoes that narrative. If so, it could ignite fears of a disconnect between Fed policy and official data- a scenario we see as decidedly dollar-negative.

Warsh stands out as the most USD-friendly candidate at this stage. He is generally considered more hawkish than the others, and in this May conversation with the Hoover Institute, he laid out a Friedman-style view of inflation as a strictly monetary phenomenon, and that restoring price stability is the Fed’s path back to credibility. We could see the dollar gain support on his nomination. Waller may be the second-best option from a dollar perspective, while Hassett and Malpass lean more dovish and may be perceived as more prone to giving way to Trump’s will. Their nomination would be a worse outcome for the dollar, in our view.

Trump also discussed trade yesterday, with two highlights: he said semiconductor and pharma tariffs will be announced next week, and that he is “getting very close” to extending the China trade truce. Markets priced little risk of the truce not being extended, but the imminence (and some uncertainty on the size) of sectoral tariffs is having a net negative impact – albeit moderate - on the yuan.

We have not seen huge FX moves since Friday’s post-payrolls large swings. The dollar had started to recover some ground yesterday but a soft ISM services reading sent it back to Monday’s levels. We don’t have major data to monitor today, but there are speeches from the FOMC’s Lisa Cook and Susan Collins. They are both voters and dovish leaning, so there is some risk they’ll put a September cut on the table after the weak jobs report. We retain a bias for a weaker dollar this week, as we expect the dovish repricing in Fed expectations to show more clearly in FX dynamics and because an earlier-than-expected FOMC nominee by Trump risks swinging the balance more to the dovish side for the remaining three Fed meetings this year.

Francesco Pesole

The eurozone’s July PMIs were revised marginally lower yesterday, but that is hardly meaningful for a market that isn’t receiving any input from the euro side. EUR/USD remains almost entirely driven by the dollar leg, and we continue to see decent upside potential mostly on the back of the Fed’s dovish repricing rather than any supportive eurozone story.

Looking only at post-'Liberation Day' trading, EUR/USD looks cheap. The two-year EUR:USD swap rate gap (-140bp) is 5bp narrower than it was at the end of June, when the pair was trading at 1.180. If we broaden the scope, the story is different. In September 2024, the spread was at -85bp, yet EUR/USD traded just below 1.12. The force that might be pulling the pair from trading higher could be a partial reassessment of the dollar risk premium, specifically from a growth angle. While the US payrolls now make a September Fed cut more likely, the US-EU trade deal partly dents the euro’s attractiveness as an alternative.

Our view is that markets aren’t ready to take that USD risk premium reassessment much further, with Trump’s trade policies and his pressure on the Fed keeping the medium-term bearish USD narrative compelling. Our near-term target remains 1.17, and we see further gains later this year, but we have to acknowledge that the EUR/USD’s ability to rally within the 1.15-1.20 region is not as smooth as it was a couple of months ago.

Francesco Pesole

New Zealand’s 2Q jobs data released overnight showed some slack is building, although not at an alarming pace. Unemployment rose from 5.1% to 5.2%, less than the consensus 5.3%, with employment declining 0.1% quarter-on-quarter, in line with expectations. Wages accelerated slightly more than expected, though.

For now, benign CPI figures for 2Q justify a cut on 20 August, and we remain of the view that further inflation moderation and growth uncertainty could lead to another 25bp reduction in November. Markets are fully pricing in an August move, and 42bp in total by year-end.

In line with our call that the Reserve Bank of New Zealand won’t materially outpace the rate-cutting trajectory embedded into swaps, we continue to see upside room for NZD/USD into year-end on the back of our bearish USD call, with a return above 0.60 being our base case.

Francesco Pesole

Today brings a series of economic releases from Hungary and the Czech Republic. In recent months, we have seen downward surprises in Hungary and upward surprises in the Czech Republic. Indeed, based on the May data, our economists have just revised our outlook for the Hungarian economy to 0.7% and 2.5% this year and next, below market consensus and MinFin and central bank estimates. Together with Friday's inflation figures, we expect the market to see some dovish repricing. The end of July saw a sharp hawkish shift in the rates market, with expectations for rate cuts this year largely priced out. The priced terminal rate for next year has risen to close to 6%. In recent days, we have seen some correction to the current 5.65%, and we still see more room for downside if the economic and inflation figures confirm the dovish case. This should also be visible in FX trading, where EUR/HUF remains anchored in the 398-400 range for now, but more dovish pricing should again bring some pressure on the forint.

In the Czech Republic, we usually see the opposite case. The economy is the biggest positive surprise in the region this year. Yesterday's inflation, as expected by the market, slightly decreased from 2.9% to 2.7%, which probably does not change the hawkish case much. Therefore, even today's data should not have much impact, and all eyes are on tomorrow's Czech National Bank meeting, where the central bank will also present a new forecast. Despite the fact that CZK rates saw higher volatility amid weak summer liquidity, EUR/CZK is surprisingly stable despite the rapid movement in EUR/USD. Although from an investor's perspective CZK may not provide enough juice given the previous movement, we would still prefer to be long here. CNB could still surprise with a degree of hawkishness, and the downside risk seems very limited given that the local story seems clear and global factors do not seem to be affecting the CZK market much lately.

Frantisek Taborsky