FX Update: Mutualized EU fiscal impulse plan boosts euro. FX Update: Mutualized EU fiscal impulse plan boosts euro. 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

Chief Macro Strategist

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 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

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