27 September 2023 China | Economics & Growth | FX | US

Charts of the Week: BoE Forecast Revisions, Oil Pullback, Softer CHF

Summary

The BoE’s recent suggestion that ONS wage growth data was inaccurate implies a dovish revision of the bank’s inflation forecasts.
The USD/JPY rally may be smaller than previous ones.

The SNB is easing monetary policy tightening and FX intervention, which may see CHF soften.
Extreme long positioning in oil suggests a near-term pullback.

Dovish Shift in BoE Wage Growth Assumptions

At the latest meeting, the BoE appeared to conclude the high ONS wage growth data was inaccurate. Consequently, the bank could revise their wage growth forecasts down to align with more accurate depictions, such as the DMP survey or HMRC’s PAYE data (Charts 1 and 2). That implies a much more dovish inflation outlook at the November MPR. This should aid our 2s10s GBP steepener (outright and vs EUR).

USD/JPY Spot vs Long-Dated Forwards Implies Smaller Rally

USD/JPY rate differentials are very large, especially further out the curve. This means long-dated USD/JPY forwards are pointed heavily lower. Currently, USD/JPY 5y forwards are trading at 123 vs 149 spot (Chart 3). This means markets are pricing a large decline in USD/JPY. From another perspective, during the 2012-2018 USD/JPY rally, spot rose 45% and 5y forwards rose 30%. The recent rally since 2021 has seen USD/JPY spot rise 45%, while 5y forwards have only risen 20%. So, the USD/JPY rally may be smaller than past ones.

CHF to Relinquish YTD Gains?

In addition to concertedly raising rates, the Swiss National Bank (SNB) has been aggressively buying CHF (Chart 4). Yet last week saw a change: the SNB paused hikes and hinted it will less aggressively intervene in FX markets. Could this prompt CHF to soften? We think EUR/CHF could trade to parity.

Brent Pullback to $87.50?

CFTC’s Commitment of Traders (CoT) data shows long positioning keeps increasing into extreme territory (Chart 5 and 6). Meanwhile, X3Z3 calendar spreads widened and diverged from the price action in front-month crude. Inventories across the US, Europe ARA, and Singapore reflect a tight market. However, we believe much has been priced in.

The oil price already reflects an undersupplied market. Large draws or a supply shock are necessary for material upside. In the short term, we see a pullback toward $87.50 on extended positioning.