FX FX FX

FX Update: Mutualized EU fiscal impulse plan boosts euro.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Today the euro got a fresh shot in the arm on the indication that the coming fiscal impulse from the EU to address energy and defense priorities will be mutually funded. Yields snapping back higher suddenly have the JPY under pressure again. Elsewhere, wild swings in commodity prices and weak risk sentiment yesterday suddenly took the wind out of the sails for the Aussie, which finds itself trading back in the old range versus the US dollar.


FX Trading focus: Euro rallies anew, this time on planned mutualized fiscal push

Yesterday’s euro rally fizzled as it wasn’t built on any real news after a Russian proposal about halting its invasion seemed overinterpreted relative to the offer that was actually on the table. Indeed, nothing significant has changed on the ground in Ukraine, where even humanitarian ceasefires are not working. A fresh euro rally materialized early today out of the blue on the headline from a Bloomberg article suggesting that the EU could issue a massive “joint” (mutual) bond sale to fund energy and defense priorities that have become so stark in the wake of the Russian invasion of Ukraine. More details may emerge within a week, including the size of the package, but this will represent a deepening move toward mutualization and is generally euro-supportive, especially in the hopeful event that hostilities in Ukraine are ended soon. The euro discount will need for European energy and power prices to move back to relatively normal levels and for its security situation to improve. The euro bounced back above 1.0900 versus the USD at one point and solidly above 1.01 in EURCHF was seen today, as well as 126.00+ in EURJPY as EU sovereign bond yields jumped back higher. CEE currencies are also sharply higher today – another sign that the euro and its orbit have a hard time heading to new lows without fresh, terrible news. The National Bank of Poland would do well to hike by more than the 50 bps expected (to 3.25%) today if it wants PLN to firm further. The SEK is curiously absent from the party…today the Swedish Finance Minister hinted at the need for a fiscal response to counter the impact of the war in Ukraine.

In a less-than-promising sign of where the situation may lead from here geopolitically, a one-liner in my Bloomberg news feed suggests that China is considering investing in Russian energy and commodity firms. Arguably, this can be done entirely in self-interest as economic sanctions against Russia risk destabilizing that country’s economy and commodity output. And China’s enormous commodity import bill has just ballooned massively, setting in motion all kinds of insecurities on the economic outlook. But such a move risks a fresh round of escalating geopolitical tensions with the US and with Europe if it does go down the path of investing strongly in Russia.

The idea of a halt of Russian crude oil and natural gas is being bandied about again, with the US mulling such a move, while Canada says that opening the Keystone XL pipeline would allow the US to import more than enough crude. The EU has spoken in favour of a ban, but German Chancellor Scholz has been out speaking against the idea as Germany can’t absorb a sudden halts energy supplies. One estimate puts Germany as reliant on Russia for 68% of its primary energy needs via imports of coal, oil and natural gas. One European oil major, Shell, has declared a self-sanction against Russian deliveries of crude oil today after its recent purchase of a Russian consignment brought a firestorm of criticism.

Chart: AUDUSD
The Aussie corrected badly yesterday amidst wild commodity swings and an ugly further downdraft in risk sentiment. Massive margin calls and short squeezes are creating tremendous price moves – especially in a now dysfunctional nickel market, with that market experiencing an epic melt-up that required the LME to intervene and halt trading, with a Chinese tycoon on the hook for billions in losses. The Aussie had been strong prior to the last couple of sessions on the fundamental angle that Australia offers what the world is desperately short of: wheat and LNG in particular of late. But funding for commodities trading is virtually only in one currency: US dollars, and this, plus signs of market stress and poor liquidity are likely behind the correction in the AUD back lower versus the US dollar. If the pair does not quickly spring back above the 0.7300-50 zone, it could end up mired back in the lower range – a couple of key sessions ahead for AUD traders to check the overall status of the currency. Another angle is the geopolitical one, as China warned the US yesterday against creating a “Pacific NATO” aimed at backing Taiwan (Australia has signed a nuclear sub deal with the US). Finally, Australia must hold a national election before the end of May, with a massive shift and Labor government incoming, if polls are reasonably accurate.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The FX Board is slow (by design) at picking up trend shifts, but the Aussie is losing momentum altitude now, as is the CHF as yields have picked up and as the plans for a coming EU fiscal impulse are absorbed.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Interesting to note that AUD weakness also felt in AUDNZD, which has suffered a huge setback yesterday that has followed through in today’s trade – is this the market concern about the forward global economic outlook or geopolitical concerns? Too early to tell. Also watching USDCAD as it trades up into the top of the range despite the elevated crude oil prices.

Source: Bloomberg and Saxo Group

Today’s Economic Calendar Highlights (all times GMT)

  • 1330 – US Jan. Trade Balance
  • 1330 - Canada Jan. International Merchandise Trade 
  • 2215 – Australia RBA Governor Lowe to speak
  • 2330 – Australia Mar. Westpac Consumer Confidence
  • 0130 – China Feb. PPI / CPI

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