Markets
Dollar correction today. It’s only the second time since March 31 that the greenback (trade-weighted DXY) loses over 0.5% in a single session. DXY returns below 100.50 after failing to take out the 101-mark yesterday. There’s no strong driver, though yesterday’s inability to outperform when short term US yields add 14 bps was already telling. The US 10-yr real yield simultaneously tested 0% for the first time since early 2020 whereas the German 10-yr real yield remains stubbornly low around -2%. Equity sentiment improves today, perhaps related to Russian foreign minister Lavrov’s ruling out using atomic weapons. The EuroStoxx50 in any case gains 1.8% today. From a technical point of view, the index is testing the incoming downtrend line which connects highs from January, February and March (see graph). Regaining 3900 or even 4000 is necessary to turn the picture more neutral again. Returning to the dollar, the greenback loses out against all other majors. USD/JPY traded briefly above 129 (multi-decade high) before sliding to the low 128-area. EUR/USD set an intraday top at 1.0860, but the single currency still lacks the momentum to add some gains. Comments by Latvian ECB governor Kazaks are interesting, but ignored by markets. He is the first one to openly put a rate hike as soon as July on the table. He says that the ECB doesn’t have to wait to see stronger wage growth and that a gradual (normalization) approach isn’t the same as a slow response. Once the normalization process starts, 0% isn’t the cap for the deposit rate. That’s a clear hint towards a genuine tightening cycle rather than to removing ultra-accommodative settings. Bundesbank president Nagel joined the early breakaway by warning that it is becoming increasingly unlikely that inflation will return to the central bank’s 2% goal. He says that the ECB may be able to stop asset purchases at the end of Q2 so that the ECB could raise rates early Q3. This second shot by an ECB governor did have an intraday effect on markets. Front end European yields erased intraday losses. The German yield curve flattens with daily changes varying between +1.3 bps (2-yr) and -7.7 bps (30-yr). The US yield curve bull flattens with yields sliding by 0.8 bps (2-yr) to 6.5 bps (30-yr).
News Headlines
Riksbank governor Ingves made the April meeting a live one. In an interview held last week, before a consensus-beating inflation release (6.1% y/y in March), but only published today, Ingves said the central bank cannot sit idle if inflation remains above the 2% target. It would “risk losing the anchor on price increases in the Swedish economy”. Neither did he push back against markets pricing in about ten rate hikes by early 2024. This implies a lift-off at the June 30 or even the April policy meeting next week. Several Riksbank officials have been preparing markets for a policy shift in recent weeks, burying longstanding guidance of zero policy rates at least until 2024. The Swedish krona strengthened as a result and breaches through recent resistance levels of EUR/SEK 10.25/27 (previous EUR/SEK April lows/200dMA) today.
Canadian inflation quickened to a 6.7% y/y in March (5.7% in February), driven by a strong monthly increase of 1.4%. Consensus expected 6.1% y/y (0.9% m/m). Inflation averaged 5.8% in Q1, more than the 5.6% the Bank of Canada estimated. Core measures varied between 2.8%-4.7% to come in at an average 3.77% vs 3.53% in February. Details revealed large price jumps in transportation (3.5% m/m on soaring gasoline prices) and recreation & education (1.8% m/m). Shelter (1% m/m) also surged exceptionally strong. Today’s reading reinforces speculation for a continuation of double-sized rate increases by the BoC. The central bank started doing so at the meeting last week. Canadian money markets are just shy of fully pricing in another such move in June. The Canadian dollar extended earlier gains after the release. USD/CAD weakens from >1.26 to 1.252 currently. EUR/CAD is testing the 2022/multi-year lows at 1.355.
