Sunset Market Commentary – Action Forex


Another dropout in the monetary policy ultimate survivor this morning. The Reserve Bank of Australia made a Swedish Riksbank-style sudden policy U-turn, leaving the ECB flanked by only the Swiss National Bank and the Bank of Japan. The RBA wrongfooted many both with the timing of the hike (ahead of Q1 wage growth and ahead of parliamentary elections) and with the size of the inaugural move (25 bps vs 10 bps outside chance discounted). European interest rate markets immediately added to their bets that the ECB will follow swiftly with a July rate hike. The EU 2y swap rate temporarily traded above the psychologic 1% mark for the first time since 2012. The German 10-yr yield crossed that same number for the first time since 2015. The 2015 top at 1.06% remained just out of reach. This time around, the sell-off didn’t last though. We’re probably too close to the FOMC meeting to add to directional bets from current levels. Core bonds recovered intraday losses and even eked out some gains as the European trading session evolved. The EMU unemployment rate declined from an upwardly revised 6.9% in February to 6.8% in March – an EMU record low – but didn’t impact trading. The German yield curve bull flattens at the time of writing with yields falling by 0.7 bps (2-yr) to 7.6 bps (30-yr). The US yield curve moves in similar fashion with yields 2.7 bps (2-yr) to 6.8 bps (20-yr) lower. The US 10-yr yield earlier on the day for a second straight session failed to take out the 3% mark. European stock market record small gains on a daily basis, but their performance remains unconvincing.

In FX space, the dollar’s multisession attempt to take out EUR/USD 1.05 failed again. It caused some rebound action north of 1.055, but the short term rebound high at 1.0593 remained out of reach. The trade-weighted dollar currently changes hands at 103.15 from an open at 103.60. Moves on FX markets probably fit in the general cautiousness ahead of tomorrow’s FOMC gathering. Rien ne va plus. EUR/GBP seemed trapped in a kind of similar paralysis ahead of Thursday’s Bank of England meeting with the pair hovering around the 0.84 big figure. EUR/GBP 0.8420 is currently on the charts. News Headlines

Hong Kong’s economy contracted by much more than expected in the first quarter of this year. GDP was down 2.9% q/q (-4% y/y) vs -0.9% (-1.3% y/y) expected. It’s the biggest setback since Q1 of 2020. The coronavirus is again responsible. Tough restrictions to beat down a fifth wave made domestic household spending collapse. These effects should ease going forward thanks to the accelerated reopening plans. Externally, moderating global demand growth and China’s zero-Covid strategy hampering trade flows from and to the mainland posed substantial drags to exports, a government spokesperson said. The person added that the global economic outlook is being challenged by central banks expediting monetary policy tightening. The HK dollar loses against most peers but the market reaction in USD/HKD is limited. This may be because the pair is stomping at the upper bound of the 7.80 +/- 0.05 peg lately. Losses beyond that level could trigger 2018-2019 style FX interventions by the Hong Kong Monetary Authority.

Italy’s PM Draghi called on the EU to address soaring energy costs and the economic impact of the Ukraine war the way it did with handling Covid, saying individual national budgets won’t make the cut. He argued for the SURE unemployment scheme to be extended in scope so that it eg. can be used to finance tax relief measures to support lower real wages. For long-term investments in areas such as defense, energy and food, NextGenEU offers inspiration.

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