The fall of the euro and the pound sterling continues

Insight: Russia’s decision to cut off gas supplies to Poland and Bulgaria and the sharp sell-off in US stocks yesterday clouded markets today. But not the dollar. The euro broke $1.06 for the first time in five years and the greenback rose against the yen after falling to a seven-day low. Major stock exchanges in the Asia-Pacific region fell more than 1%, except for China and Hong Kong. The Hang Seng made a minor gain, but the Chinese CSI 300 rose almost 3%. The European Stoxx 600 fell but rallied with help from the Materials, Consumer Discretionary and Energy sectors. US futures contracts are firm. Treasury yields recovered some of yesterday’s decline, putting the 10-year near 2.77% and the 2-year near 2.58%. European yields are mostly firmer and core-periphery spreads are widening. On the foreign exchange market, the greenback is mixed. The Antipodes and Scandis are firm, especially the Australian dollar, after the higher than expected Q1 CPI. The yen, euro and Swiss franc are heavy. Emerging market currencies are generally weaker. It should be noted that the Philippine peso and the Mexican peso are among the strongest today. Hungary, the only EU country that agreed to pay Russia in rubles, is among the weakest (~0.9%). That dubious honor goes to the South Korean won today, down 1.1%, the biggest loss since last June and the fifth straight decline. Gold was sold to fresh two-month lows near $1887 before stabilizing. June WTI is firm but in a tight range (~$101.50-$103) near yesterday’s highs. US natural gas prices are up almost 0.75% after gaining nearly 5% in the past two sessions. The European benchmark rose about 8.2% yesterday, on top of yesterday’s nearly 6% gain. It is back to early April levels. Iron ore rose for a second consecutive session, while copper tries to end a three-day slide. July wheat is flat after rising 2% yesterday.

Asia Pacific

Australia’s Q1 CPI rose 2.1%, faster than the 1.7% predicted by Bloomberg’s survey median and well above the 1.3% increase in Q4 21. The year-over-year pace accelerated to 5.1% from 3.5%. Underlying metrics also increased. The central bank meets next week and the market sees inflation figures as raising the odds of a rate hike, which was previously expected after the May 21 election. Yesterday, the market had about six basis points of tightening discounted for the May 3 meeting. There is now an 18 basis point increase in spot rate futures.

The Bank of Japan’s two-day meeting started today. Officials have clearly signaled no intention to change course. His defense of the 0.25% cap on the 10-year yield continued until today, but yesterday’s drop in global yields eased some pressure in the JGB market and there was 10-year bond sellers at the BOJ in its fixed rate operation. The BOJ is well aware that energy and food prices increase measured inflation and that the reduction in mobile phone charges is excluded from the 12-month comparison. He pushes back and says these developments do not make the CPI increase sustainable. Also note that the new economic package is expected to reduce the headline CPI by 0.5% over the May-September period.

Many observers still seem to put the cart before the horse. They fear that the weak yen will reduce Japanese demand for Treasuries. Recent price action supports the hypothesis that the causal arrow is pointing in the other direction. Rising US yields weaken the yen. The US 10-year yield peaked on April 20. The dollar against the yen as well. They both recorded eight-day lows earlier in the day and recovered. Additionally, indirect offers show that recent US Treasury auctions have been strong, including yesterday’s two-year note sale. This is where foreign participation is often captured.

The dollar found a bid after slipping a bit below JPY127. A $540 million option at JPY 126.75 is launched today. The greenback has already resurfaced above JPY128. A move above 128.25 JPY would lift the tone, but it needs to break above 128.50 JPY to sign another attempt at the 129.50-130 JPY zone. The Aussie dollar rose from around $0.7120 to near $0.7200, but the bullish momentum waned and it fell back to the $0.7140 zone at the end of the trade. Asia-Pacific. That said, intraday momentum indicators suggest the possibility of retesting the North American highs. The Chinese yuan has been trading at its narrowest range in just over a week. The dollar is consolidating its recent gains and is trading roughly between CNY 6.5480 and CNY 6.5615. The reduction in reserve requirements for foreign currency deposits seems to have succeeded not in raising the yuan but in stabilizing the exchange rate. The PBOC set the benchmark dollar rate slightly higher than expected in the Bloomberg survey (6.5598 CNY vs. 6.5596 CNY).

Europe

In a bizarre twist of events, Russia insists on being paid in rubles for its gas while Europe insists on joining hard currency payment contracts in euros. Russia is carrying out its threats and has announced that it is cutting off gas supplies to Poland and Bulgaria. Poland’s gas supply is around three-quarters of its capacity, so the supply cut will not be immediate. Bulgaria indicated that it had taken measures to guarantee alternative supplies. Russia’s actions raise the question of who is next and it will likely be seen next month. That said, Europe’s unwillingness or inability to move faster on gas reveals its vulnerability, which Russia is exploiting. It’s leaving Europe before being fired, in a way. Meanwhile, tensions are rising in the breakaway region of Moldova. Some argue that Russia will likely end up linking the parts of Ukraine it seems to be trying to take with the region of Moldova, which would lock Ukraine in.

Musk’s takeover of Twitter sparks debate over free speech in the United States. Constitutional law protects American citizens against the restriction of this right by Congress and not by the private sector. Obviously, newspapers do not have to print every opinion submission they receive, and that does not deprive rejected authors of their freedom of expression. In Europe, the reaction is different. Musk is reminded that Twitter, regardless of its ownership structure, must adhere to the Digital Services Act, approved last week. This forces platforms to moderate the illegal and harmful content that their users post.

The €1.4 billion option at $1.06 which expires today appears to have been neutralized. The Euro fell to around $1.0585 in late Asia and early Europe. Initial resistance is near $1.0630 and then $1.0660. In contrast, the 2015-2017 lows were between $1.0340 and $1.0530, but there is increasing talk of a cross to parity not seen since 2002. The losses in the sterling were also extended. It fell to around $1.2535 before recovering to around $1.2590 in the European morning. The $1.25 area represents the retracement (61.8%) of the British Pound’s rally from the March 2020 low near $1.14. The next point on the chart below is the June 2020 low around $1.2250. Over the past five sessions, the pound has lost more than a nickel. The lower Bollinger Band is pegged two standard deviations below its 20-day moving average, and the British Pound’s losses are nearly three standard deviations below the 20-day average.

America

The United States is reporting mortgage applications, which have fallen every week since the end of January. March pending home sales are expected to have fallen for the fifth straight month. March’s trade deficit, which remains close to a record imbalance, and March’s inventories (wholesale and retail) will help economists put the finishing touches to the first quarter GDP forecast ahead of tomorrow’s report. Due to retail sales revisions reported earlier this week, the Atlanta Fed’s GDP tracker fell to 0.4%. He will update it again after today’s reports.

As noted, yesterday’s US sale of $48 billion in two-year notes was very well received. Indirect bidders won 2/3 and direct bidders took an additional 21.4%. That left dealers with just over 12%, the lowest in nearly two decades. On the program today, a floating auction of $30 billion over two years and a ticket sale of $49 billion over 5 years. Still, the angst in some corners of the market over the implications of a strong dollar on foreign demand is unlikely to dissipate.

Bank of Canada Governor Macklem has outlined the logic of raising rates even though it will have little impact on the prices of internationally traded goods which are seen as the main drivers of Canadian inflation . He argued that keeping inflation expectations anchored will help prices ease when rising energy and disrupted supply chains ease.

Mexico releases March trade figures. The balance may have tipped into a slight deficit after posting a $1.29 billion surplus in February. Tomorrow it will release unemployment numbers ahead of Friday’s preliminary Q1 GDP. After a flat Q4-21, it should have increased by around 1% in Q2 quarter over quarter. Brazil today releases the April IPCA inflation measure. It should have accelerated to 12.15% from 10.79% in March. This will challenge signals from the central bank that next month could be the peak of what has been an aggressive tightening cycle.

Unlike Russia’s invasion of Ukraine, risk aversion is now seen as negative for commodities and commodity-related currencies. The Canadian dollar suffered in this phase despite constructive macroeconomic considerations. The US Dollar bottomed last week near CAD 1.2460 and approached CAD 1.2850 today. The high of the year was reached in early March, slightly north of 1.29 CAD. The greenback has closed above its upper Bollinger Band for the past three sessions and remains above (~CAD1.2810) now. The greenback remains within the range set on Monday against the Mexican peso (~MXN20.16-MXN20.4850). A convincing break of 20.50 MXN could stimulate a quick move towards 20.60 MXN-20.65 MXN. Note that the upper Bollinger Band sits slightly above MXN20.40 today. The Brazilian real is a market favorite this year, with high yields, monetary policy near a peak and exposure to commodities. However, alongside Latam in general and the pullback in the metals, market participants rushed to reduce their exposure to both options and futures markets. The dollar fell from around BRL 4.60 a week ago to almost BRL 5.00 yesterday. A move above it today could target the BRL5.20 zone.

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