FX Update: Mutualized EU fiscal impulse plan boosts euro.

FX Update: Mutualized EU fiscal impulse plan boosts euro.

Forex 5 minutes to read
John J. Hardy

Global Head of Macro 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

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992