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UK Fiscal Outlook Sends Cable To Record Lows, PBOC Slaps 20% Risk RRR On FX Forward Sales


Aggressive sterling sales resumed Monday morning as PM Truss' government stood by its mini-budget which inspired sharp depreciation in the exchange rate last Friday. In the weekend round of interviews, Chancellor Kwarteng played down the initial market reaction to his fiscal plans and doubled down on his pledge to cut taxes and boost spending, while refusing to commit to any limit on borrowing.

  • The Telegraph reported that Truss could face a rebellion from Tory backbenchers if cable falls to parity, while the pound's sharp depreciation has raised questions about the likelihood of BoE action to rescue the beleaguered currency.
  • GBP/USD tumbled to an all-time low of $1.0350 before stabilising near the $1.0500 mark in a volatile session. Implied volatilities were sharply higher across the maturity curve, with one-month tenor printing best levels since the outbreak of the COVID-19 pandemic.
  • EUR/GBP surged to its highest point since Sep 2020, taking out the GBP0.9100 figure in the process. The single currency showed little in the way of outright reaction to the preliminary results of Italy's general election, with the right-wing bloc on track for an absolute majority.
  • Sterling weakness underpinned USD outperformance as the BBDXY index advanced to a new record high of 1,355. The greenback drew additional support from higher U.S. Tsy yields as cash trading resumed in Tokyo after Japan's long weekend.
  • USD strength pushed USD/JPY towards the Y144.00 mark, even as Japanese officials rattled the intervention sabre. FinMin Suzuki expressed concern about "speculative moves" and vowed readiness to step in if needed.
  • Offshore yuan got some brief reprieve as the PBOC slapped a 20% risk reserve requirement on FX forward sales, but spot USD/CNH promptly resumed its uptrend, with the USD/CNY mid-point set above CNY7.0 for the first time since 2020.
  • The central bank speaker slate is tightly packed today. President Lagarde headlines a parade of ECB members, while comments are also due from Fed's Bostic, Mester & Logan, as well as BoE's Tenreyro & BoJ's Kuroda. German Ifo survey takes focus on the data front.

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