Tuesday, 19 April 2022
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•          The ECB on Thursday last week disappointed euro bulls as they went into a four-day weekend. They hoped for something more than an almost unchanged assessment, especially after inflation in March again surprised to the upside. Between the lines we still read that a July rate lift-off is certainly possible, but the euro required a clearer signal. EUR/USD fell from an intraday high of 1.0923 to below 1.08 but managed to close above still (1.0828). That was just postponing the inevitable though. The pair in the days thereafter, admittedly in low-volume trading, eased further. As of this morning, EUR/USD is trading in the 1.077 area; a support zone marked by the February-May 2020 correction lows. In case of a break we’re eying a return to the pandemic low of 1.0636. This looks increasingly likely, especially with Fed governors now starting to talk about 75 bps rate hikes. The governor in case, Bullard, said it was not his base case today but remember how 50 bps moves was no-one’s either, until recently. Moves in EUR/GBP were similar yet less dramatic from a technical point of view. The duo forfeited 0.83 but steered clear from the 2022 low. It even staged a minor rebound after hitting support at the lower bound from the downward sloping trend channel into the high 0.82 zone currently. Interest rate markets behaved interestingly. The European front-end eased a few bps in the wake of the ECB leaving markets still a bit in the dark with respect to the timing of a first hike. The German 2y yield neared 0% but a return into negative territory was never really an option (0.05%). Europe’s 2y swap finished at 0.70%, down 3 bps. The long end, however, underperformed heavily. The steepening (8 bps rise in the German 10y yield or 9-10 bps in swaps) came as inflation expectations remain on the rise. Markets judge the ECB as being too slow to react. Depending in the gauge, indicators melt up to cycle/multi-year highs or even series highs. Reports (from the NYT) that the EU is moving towards adopting a phased-in ban on Russian oil obviously add to such moves. In just five days, Brent jumped from $100 to $113/b currently. Yield dynamics also put EUR/USD weakness into perspective since inflation expectations in the US have plateaued. Real yields are the driving force there. The 2-y yield stabilized near but below 2.50%. The 10y yield however just yesterday hit a new cycle high of 2.85% and the 30y is within 6 bps of the 3% landmark. It is also what is crushing the Japanese yen: USD/JPY soars past 128 this morning to a 20-year high. We see few reasons for the current yield trends to dramatically reverse course for the time being. As such, there’s no stopping king dollar either.

News Headlines

•          In the Minutes of the April policy meeting, the Reserve Bank of Australia indicated that time is coming closer for conditions to be fulfilled to raise its policy rate. The RBA sees core inflation rising above the 2%-3% inflation target band in the Q1 and further upward pressure is likely. The RBA also sees wage growth picking up, however this develops still at a pace that is likely below rates that are consistent with inflation being sustainably at target. The Bank will closely monitor important additional evidence on both inflation and the evolution of labour costs. Markets are discounting a rate hike first rate hike for the June 7 policy meeting. The Australian 2-y yield rose 7.8 bps to 2.11% this morning. The Aussie dollar rebounded slightly after recent correction to trade near 0.7370.
•          Economic data for the first quarter published in China yesterday painted a mixed picture. GDP growth unexpectedly rose from 4.0% Y/Y to 4.8% Y/Y YTD. Industrial production eased to 6.5% YTD Y/Y, retail sales growth slowed from 6.7% YTD Y/Y tot 3.3%. The March figure even declined to -3.5% Y/Y. The surveyed jobless rate also unexpectedly jumped from 5.5% to 5.8%. The property sector faces ongoing headwinds (residential property sales YTD declining to -25.6%). In a statement, the PBOC announced a series of 23 selective measures to support the economy. Amongst others, the package includes relending programs making funds available for banks to continue to finance sectors that are hit by lockdowns/the consequences of the pandemic. The Bank also advocates banks to continue to support financing to local governments’ projects and other major investment projects. For now, the bank didn’t signal any RRR cut or broader rate reduction.


European yields (more than) recovered from the early stages of the Russian-Ukrainian war. The expected growth slowdown doesn’t deter the ECB from stepping up the normalization plans. QE is to end in Q3 with a rate hike already possible in the same quarter. The trend in yields remains north. The German 10-y yield surpassed the 0.80% 2018 top. If confirmed, it would signal that European bond markets are entering a new era.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. Several 50 bps rate hikes are likely. The US yield curve initially developed a bear flattening trend. However, bold plans to shrink the balance sheet ($95bn/month) also support yields at longer maturities.

The ECB accelerating the normalization schedule triggered a test of first resistance at EUR/USD 1.1121. A sustained break higher didn’t occur. The more aggressive Fed turned the odds in favour of the dollar instead. EUR/USD fell out the closing triangle and lost support from the 2022 low at 1.0806. The pandemic low of 1.0638 is the next downside reference.

The Bank of England turned more dovish at the March policy meeting. Markets however don’t buy into the cautious normalization approach. Sterling still holds the upper hand. Since April, EUR/GBP slid almost non-stop. The pair tested the 2022 (closing) low.

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.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
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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