Chief Macro Strategist
Summary: The euro has lifted further today, nearly touching 1.1000 in EURUSD terms in anticipation of a significant new fiscal boost and as risk sentiment has improved today in Europe despite a lack of positive developments in Ukraine. Elsewhere, short US yields have pulled to new cycle highs in the US ahead of the FOMC meeting next Wednesday, while longer yields are higher nearly everywhere, applying pressure on the Japanese yen and Swiss franc.
FX Trading focus: Euro continues boost on higher yields, rising risk sentiment
Anticipation of a new EU fiscal boost to address urgent new energy and defense priorities in the wake of Russia’s invasion of Ukraine has helped the euro to stabilize and even recovery sharply versus the traditional safe havens, especially the JPY and even CHF. This was at least in part as EU yields responded to the news of an impending new fiscal push. The timing could certainly also have to do with the ECB meeting up tomorrow, which is a very difficult one for Lagarde and company. Too easy a message due to the exigencies created by the war in Ukraine and the EU risks even worse inflation, while too strong a message looks out of touch with the economic strain from the situation. I like the idea of abandoning the odd orthodoxy around “sequencing” – the idea that quantitative easing needs to be wound down before rate hikes begin. But let’s see what the ECB is set to say: it certainly needs to go long credibility in some shape or form on the inflation front – at minimum that is resolutely set to maintain a “nimble” or “flexible” stance that indicates it will be ready to very quickly begin policy tightening lift-off if the clouds of war lift. A look at the charts shows how very far the euro still has to go if it wants to neutralize the latest down-draft: EURUSD traded 1.1300 on the day Russia invaded Ukraine and was probably already slightly discounted due to the risk of a war breaking out – to get back to these levels, the war may need to end, or at least the asymmetric pressure on the EU’s economy will need to end. Still, I am open to the idea that the EURUSD in particular may have bottomed for the cycle and EURCHF as well.
Chart: USDJPY
Long US treasury yields have rose sharply yesterday and risk sentiment has improved today, both of which have helped USDJPY pull back toward the cycle highs above 116.00 today. The European sovereign market may actually be one of the drivers for JPY weakness as European yields all along the curve responded strongly to the news that the EU is set to announce a significant new joint issuance of bonds to fund energy and defense spending initiatives. Short US yields are at new cycle highs as well as the market is pricing quarter-point moves from the Fed as far as the eye can see, with more than six hikes “priced” for the forward curve through the December FOMC meeting again, only about 7 basis points south of the cycle highs from early last month. When risk sentiment stabilizes as it has suddenly done today, the combination of that together with yields pulling back higher injects extra energy into JPY weakness. This after the JPY backed up sharply as a safe haven in the wake of Russia’s invasion of Ukraine. The Bank of Japan has never changed its tune on policy and was out defending the 0.25% cap on 10-year JGB’s in February just before yields dipped a bit and then dipped more on the Ukraine-linked deleveraging and spike in commodity prices (high energy prices an additional source of JPY stress as Japan imports virtually all of its energy). If long yields continue to pick up and head back to cycle highs in Europe and the US, the JPY could come under significant pressure again – we’re not there yet, but USDJPY isn’t far from the cycle highs above 116.00, nonetheless.
RBA Governor Lowe was out overnight speaking on the state of the Australian economy and the outlook for monetary policy, even with helpful charts. The focus is on everything from Australia’s so far relatively muted inflation outcomes (hmmm – don’t we need a look at Q1 CPI…?) which are in part due to less volatility in domestic energy prices and a less heavy-handed fiscal approach during the pandemic than, ahem, the USA. The speech recognized the rise in Australia’s terms of trade from the enormous mark-up in the value of its commodities exports, but says that much of the swell in corporate profits for extractive industries and related tax revenues for the government will be offset by margin pressures for other companies and a pinch on household budgets, so that the aggregate national income increase will be saved more than spent. On monetary policy, the RBA is still quite balanced, modestly concerned with both moving too late and too early. Wages are a primary focus and have not accelerated or suggesting any risk of a wage-price spiral, even if Lowe expressed a bit of insecurity that the bank doesn’t have modern experience of how wages will behave at anticipated new lows in the unemployment rate. The other area of insecurity was whether the new supply side shock could destabilize inflation expectations, something it will be watching for carefully. In terms of actual rate hike guidance, we only get the indication that the bank anticipates hike rates “later this year”. Interestingly, the market is pricing the risk of far higher rates by year-end, with lift-off as early as the June meeting and five hikes through the December RBA meeting.
Yesterday, the National Bank of Poland hiked 75 basis points to take the rate to 3.50%, this versus the 50 basis point hike expected. It backed up the move with the threat of intervention if PLN volatility persisted. The timing was perfect for maximum impact, given the recovery in the euro yesterday (a better outlook for the euro and stronger risk sentiment in euro usually feeds through to even more strength in CEE currencies and SEK, for example) after EURPLN touched the 5.00 level for the first time since the 1990’s-era redenomination. Governor Glapinski will hold a press conference just after this piece goes live.
Table: FX Board of G10 and CNH trend evolution and strength.
A change of pace is rapidly unfolding now across FX as gold has lost tremendous altitude today after a huge run-up, while the euro has surged and peripheral euro FX even more so (see the SEK +2.8 change of 2-day momentum), while safe haven currencies have reversed – this is a significant mean reversion even without any improvement on the ground in Ukraine. Tomorrow’s ECB meeting is likely to tell us how much of this was merely position squaring ahead of the ECB meeting.
Table: FX Board Trend Scoreboard for individual pairs.
Note the scale of the reversal in EURGBP relative to other Euro pairs – far more significant and a negative sign for sterling. Elsewhere, too early to draw conclusions in may places, but watching the top of the range in USDJPY and whether the AUDUSD bearish reversal was a red herring as the bounce back unfolds….
Today’s Economic Calendar Highlights (all times GMT)
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Commodity Strategy
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Chief Investment Strategist
Quarterly Outlook
Head of Fixed Income Strategy
Quarterly Outlook
Head of Commodity Strategy