Tuesday, 5 April 2022
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Markets

•          The EU condemned Russian war crimes in Ukraine and looks into stepping up economic sanctions. The risk of a new escalation increases and triggered a first meaningful correction higher in European bonds in over a month. German yields dropped by 1.4 bps (2-yr) to 4.9 bps (10-yr) with the belly of the curve outperforming the wings. The US yield curve by contrast steepened with the front end correcting 3.5 bps lower and the very long end gaining 2.5 bps. The euro lost out against the dollar and sterling. EUR/USD returned below 1.10 with 1.0961/45 final intermediate support ahead of the March low of 1.0806. EUR/GBP almost lost 1 big figure to close at 0.8366. The technical picture in EUR/GBP remains neutral. Oil prices surged from $104/b on Friday to nearly $110/b this morning. Saudi prices increases add to negative sentiment around Ukraine. In absence of important eco data, trading dynamics will continue to be driven by geopolitics. Yesterday’s stock market gains were in this context somewhat surprising.
 
•          The Reserve Bank of Australia (RBA) kept its policy rate unchanged at 0.1% this morning and for now doesn’t succumb to pressure to start a tightening cycle. The policy statement nevertheless shows green shoots about a possible imminent turn. The May 3 meeting could be too early despite updated growth and inflation forecasts. The RBA by that time will have Q1 CPI data available (Apr 27), but Q1 wage numbers (May 18) and federal elections (May 21) might warrant a delay. The central bank convenes next on June 7. Australian money markets fully discount a 25 bps rate hike at that meeting. The RBA in this morning’s statement still used subdued wage growth as prime reason not to raise policy rates yet. Nevertheless, the connation is changing. Wage growth has picked up and in some areas the rate exceeds the pre-pandemic one. The RBA also predicts a further increase given tightness in the labour market. In its closing paragraph, the RBA dropped a reference to being “patient” as it monitors how the various factors affecting inflation evolve. The Aussie dollar picked up the RBA signal with AUD/USD rising from 0.7540 towards 0.7610, taking out 0.7556 resistance in the process. The pair now trades at its strongest level since June. EUR/AUD falls below the 1.45 big figure for the first time since 2017. The Aussie dollar was G10’s best performer in Q1. A relative weak starting point, rallying commodity prices and a catch-up move in RBA interest rate expectations triggered the AUD-comeback. The Australian swap rate curve bear flattens this morning with yields rising by 14.8 bps (2-yr) to 6.5 bps (30-yr).

News Headlines

•          The Bank of Canada’s quarterly business survey (2022Q1) showed a record 81% of companies saying they would have some or significant difficulty meeting an unexpected increase in demand. It highlights ongoing capacity constraints, with business citing worsened supply chain issues compared with three months ago and labour shortages. Firms expect significant growth in wages, input and output prices, the BoC found. 70% of respondents said annual CPI would surpass 3% the next two years, another record. But less than 20% expects price gains to stay above the 2% BoC target three years from now. Asked why, they referred to future improvement of supply chains and BoC rate actions. The report brings more fire to the debate within the BoC to ramp up the tightening pace. A 50 bps hike grows ever more likely. Markets price in an almost 90% chance of such a move occurring in April.
 
•          Inflation in South Korea accelerated to an 11-year high of 4.1% y/y in March (0.7% m/m), up from 3.7% in February. Core inflation excluding agricultural products and oils inched higher too, from 3.2% to 3.3% y/y. It shows surging raw material costs and energy are feeding through to consumers in the likes of housing rentals (2% y/y) and outdoor dining (6.6% y/y). The figure raises the pressure on the central bank which meets on April 14. The BoK raised rates by a total of 75 bps to 1.25% since the pandemic and stood pat in February amid growing geopolitical uncertainty. Jacked up inflation forecasts, however, suggested more hikes were under way. Now-former governor Lee said one more hike would not be considered tightening. The SK won rises marginally to USD/KRW 1210.70 this morning.

Graphs

European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. First meaningful correction in over a month as the threat of new sanctions makes the ECB’s balancing act even tougher.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike in May is likely. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Risks for a short-term correction rise as the commodity surge has eased. Medium term, the sell-off on core bond markets isn’t over.

The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. After first protecting EUR/USD’s downside, it next triggered a test of first resistance at 1.1121. A sustained break higher didn’t occur with the pair now at risk of falling out a closing triangle pattern as stakes in the Russian war are raised. A break lower puts EUR/USD 1.0806 back on the radar.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is showing signs of bottoming out.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
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Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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