FX Update: Tension builds on BoJ policy stance ahead of meeting tonight.

Fresh euro woes. The euro touched new five-year lows versus the US dollar today, in part on general risk off, but perhaps even more so after Russia used Poland and Bulgaria as guinea pigs in its threat to cut off supplies of natural gas for importers unwilling to pay for the gas in rubles. Poland saw the writing on the wall on Russian gas a long time ago and had moved to reduce its reliance before the war in Ukraine and has considerable coal-based power it can mobilize to cover some  of the shortfall, so the impact on the zloty is considerable, but need not spin out of control. Alas, Germany is the chief focus as a full shutdown would crater German economic growth on the need to ration supplies. Meanwhile, ECB member Kazaks said yesterday he is in favour of a July ECB hike – looks like consensus is gelling on that timing for lift-off.

The UK does not import Russian gas, but is under as much pressure as any other European country on the impact of any Russian supply disruptions because it is connected to the continent’s gas network and suffers the price rises together with the continental countries. An excellent commentary from Bloomberg’s Marcus Ashworth lays out the pressures on the UK economy here as it faces a “trilemma of high inflation, slowing growth and rising taxes”, with a collapsing currency possibly forcing the Bank of England to hike rates more than it would otherwise do (watching EURGBP as much as GBPUSD for the relative pressure on the UK as I would have already expected sterling to underperform more there than it has). GBPUSD looks set for a test of 1.2000 and possibly more to the downside if we are set for a significant deleveraging event across risky assets here.

The Aussie tried to get a boost on news overnight that Chinese leader Xi Jinping called for an “all out” infrastructure building push to spark economic growth, but there are few details. As well, short Australian yields touched new cycle highs while yields elsewhere consolidated after the Q1 Australian CPI report came in far hotter than expected at 5.1% YoY vs. 4.6% expected and the core “trimmed mean” was out at 3.7% YoY vs. 3.4% expected. This has strongly raised the odds of a rate hike at the RBA meeting next Tuesday to above 70%. The solid drop in the trade-weighted AUD in recent days after it had spiked to near a 5-year high has likely helped the RBA to go ahead and just get started already.

The Riksbank is widely expected to deliver its first rate hike since moving away from NIRP last year, with a 25 basis point move. Watch the rate guidance after Governor Ingves recently failed to push back against the market pricing a greater than 2% policy rate by the beginning of 2024 – while the February Riksbank meeting still forecast lift-off not to arrive until 2024! I like fading EURSEK upside, but the risk deleveraging here makes this hazardous tactically.

Table: FX Board of G10 and CNH trend evolution and strength.
Note especially the enormous positive momentum shift in the JPY head of tonight’s BoJ meeting – will BoJ deliver something that spikes momentum further or back to the downtrend? The USD uptrend reading of 8 is getting into extreme territory, but won’t necessarily calm if risk deleveraging continues/accelerates.

Table: FX Board Trend Scoreboard for individual pairs.
The “hottest” market in a long while, as can be seen in all of the extreme ATR readings (the dark orange color indicates we are in the top decile of volatility in ATR over last 1000 trading days).

Upcoming Economic Calendar Highlights (all times GMT)

• 1230 – US Mar. Advance Goods Trade Balance
• 1400 – US Mar. Pending Home Sales
• 1600 – ECB President Lagarde to speak
• 2100 – New Zealand RBNZ deputy Hawkesby to speak
• 2230 – Canada Bank of Canada Governor Macklem to speak in Senate testimony
• 2350 – Japan Mar. Industrial Production
• 0100 – New Zealand Apr. ANZ Business Confidence survey
• 0130 – Australia Q1 Export / Import Prices