Markets
• GEURONIMOOO! The euro is sliding to new multiyear lows against a range of currencies. EUR/CHF revisited sub-parity territory after recovering over the past few days from a similar adventure last week. The currency pair is currently changing hands at 0.993, the lowest since 2015. Excluding for this volatile period (after the SNB ditched the 1.20 peg), EUR/CHF trades at the lowest since the creation of the monetary union. EUR/USD is on the ropes. The combination tested the mid-May multiyear low around 1.035 a few times recently. It started again with a test today but one could see (based on moves in other crosses) how this time would be different. That key support level broke and EUR/USD slid further south below 1.03 (1.027 at the time of writing). From a technical point of view, there’s little in the way for a return to parity (76.4% dollar recovery in the 2000-2008 EUR/USD rally). After that, there’s a gaping hole to be bridged all the way down to 0.823 in a throwback to the Duisenberg era, the ECB’s first president. Even sterling was able to capitalize, temporarily at least, on euro weakness despite overall risk-off. EUR/GBP for a second time in less than a week tumbled out of the upward sloping trend channel. It then staged an intraday comeback to around 0.86 to keep the technical picture intact still. This balancing act makes sense considering what is driving the moves today. Recession fear is taking hostage of the euro with ever-higher (energy and food) inflation weighing on disposable income, corporate margins and soon (if not already) the European economy. But this is at least equally the case for the UK (see headline below). Sticking to currencies, EUR/JPY is the widow-maker now. The 140 support level (April interim high and neckline of the June double top formation) is being heavily tested. A confirmed break spells more trouble ahead for other euro crosses. It’s all hands on deck in Central-Europe. EUR/HUF is hitting new record lows at 408+. The MNB’s 185 bps super hike hasn’t convinced the forint at all. The Polish zloty is depreciating to the lowest level since end March. EUR/PLN is filling offers around 4.76. The CNB in Czechia is busy putting its large pile of FX reserves at work to prevent the CZK to weaken beyond EUR/CZK 24.75.
• As said, fears for a recession are responsible. This results in sharp gains for core bonds as markets question the central banks tightening intentions. Bunds outperform US Treasuries. German yields tumble between 13 and 16 bps across the curve. The 10y yield (1.20%) is edging closer to critical support at 1.15%. US yields ease a more moderate 3-8.1 bps but missed out on yesterday’s European yield jump. But here too, important technical levels are nearing fast (US10y 2.81% vs 2.72% support). European equities raise the alarm. The EuroStoxx50 loses 2.4% to new YtD lows of 3370. Next support is located at 3109 before returning to 3000. Wall Street opens with losses between 1.7-1.9%.
News Headlines
• In its financial stability report, the Bank of England sees the global outlook deteriorating markedly due to the war in Ukraine and downside risks could further adversely affect financial stability. Still, the bank assesses UK banks have considerable capacity to support lending to households and business even if the economic outlook worsens. Aggregate household debt relative to income has remained broadly flat and debt servicing costs for UK business are assessed to remain affordable even as higher yields, rising (living)costs, weaker growth and other issues are putting pressure on household finances and corporate balance sheets. The BoE confirmed it will raise the contra-cyclical capital buffer to the pre-pandemic level of 2.0% by June next year. The BoE will also start annual stress tests in September 2022, testing the banks resilience to deep simultaneous recessions in the UK and global economies, real income shocks, large falls in asset prices and higher global interest rates. The BoE will also conduct an in-depth analysis of the functioning of the commodities market as the Russian invasion in Ukraine illustrated the risk of these markets to amplify economic shocks.
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