Markets
US stock markets gained over 1% yesterday as risk sentiment improved during US dealings. Kremlin fake news reports on progress in Ukrainian peace talks initially caused some hesitance. US secretary of state Blinken later also openly doubted Russia’s diplomatic efforts to end the war.
News that Russia completed a coupon payment on international debt, avoiding external default, was later met with some optimism. EUR/USD tested 1.1121 resistance. The pair’s reaction function since Wednesday’s FOMC meeting suggests a stronger bottom below EUR/USD. The dollar failed to eke out additional gains on a hawkish Fed despite additional short term interest rate support.
The euro from his part finally enjoys ECB backing since last week’s actions/intentions. Expect a significant EUR/USD relief rally the day we finally get some real positive cease-fire news on Ukraine. Taking out EUR/USD 1.1121 would put us back in the old 1.1121/1.1483 range.
EUR/GBP rose from 0.8392 to 0.8435 in a technically insignificant move. First resistance stands at 0.8478. Gains probably could have been bigger following the Bank of England’s “dovish” policy rate hike (0.50% to 0.75%). The BoE toned down forward guidance on future hikes slightly because of the squeeze on UK households’ disposable income. It caused a huge outperformance of UK Gilts in a bull steepening move. UK yield dropped by 1.7 bps (30-yr) to 11.4 bps (2-yr). Changes on the German curve were insignificant, varying between +1 bp and -1 bp. US yield changes ranged between -3.7 bps (5-yr) and +1.7 bps (30-yr). The Bank of Japan kept its policy unchanged this morning (see below) while downgrading the eco outlook. The BoJ is in absolutely no hurry to follow the global policy normalization swing. Japanese inflation remains low, but nevertheless rose to its highest level since February 2020. National CPI ex fresh food this morning printed at 0.6% Y/Y, up from 0.2% in January and beating 0.5% consensus. The BoJ’s stance leaves the yen vulnerable. USD/JPY earlier this week briefly exceeded the 119 big figure for the first time since early 2016. A weekly close above USD/JPY 118.66 makes way for a return to the 2015 high at 125.86.
Today’s eco calendar is empty. Much attention will go to the call between US President Biden and Chinese president Xi Jinping. The US is worried about China siding with Russia in the conflict and won’t hesitate to impose sanctions if China effectively does so. General risk sentiment will be decisive today. Keep a close eye on energy prices as well with Brent crude yesterday and this morning gaining $10/b from $100 to $110.
News Headlines
There were no changes in the Bank of Japan’s policy parameters after holding a meeting today. The base rate remains at -0.10% and the 10y target at 0%. The BoJ did downgrade its economic assessment just two months after it was upgraded. While it cited the impact of Covid, the central bank also flagged the war in Ukraine. It is monitoring in particular the effects from it on inflation, saying it expects it to “clearly” rise on soaring energy prices. Some warn inflation may reach 2% this year with base effects also kicking in from April and with the recent weakening of the yen (especially vs the USD) acting as an accelerator. The cost-push nature of such inflation against a weakening economic background limits the scope for the BoJ for a tightening move.
Chinese president Xi Jinping made a pledge to keep the economic collateral damage from its Covid-Zero policy at a minimum, but probably won’t give up that strategy any time soon. China will “strive to achieve the maximum prevention and control effect at the least cost and minimize the impact of the epidemic on economic and social development,” he said at the country’s top financial policy committee at a time millions of people are in lockdown. The comments can be seen as part of the vow China made earlier to stabilize financial markets and stimulate the economy.
