FX Update: Yields quick to pick up whenever risk sentiment improves.

FX Trading Focus: Yield expectations rebound quickly on the slightest improvement in risk sentiment.

Markets are rebounding cautiously after the Western sanctions against Russia’s latest move to recognize the Ukrainian breakaway regions were seen as relatively measured. US president Biden announced sanctions on Russian figures near Putin, on two Russian banks, and on new purchases of Russian sovereign debt, moves similar to those made by the UK, while the EU sanctioned hundreds of Russian parliamentarians and German Chancellor Scholz announced a halt to the approval process of the Nord Stream 2 pipeline. The sanctions were positioned as first steps to be followed by more on further Russian moves in Ukraine. Risk-correlated FX has continued to trade well since yesterday, especially led by the Aussie and kiwi overnight in the wake of a more hawkish RBNZ (more below), with AUDUSD challenging above the prior pivot high near 0.7250 this morning. Elsewhere, the Scandies are pushing on interesting levels versus the Euro (10.55-50 in EURSEK and EURNOK 10.02-00). EURCHF is bid and the JPY is weak. But these moves would need to extend aggressively and stick a solid close into the end of the week to argue that something bigger is building here, together with a firmer rally in equity markets.

Meanwhile, it is interesting to note the speed with which yields have jumped back higher as the market continues to price more aggressive central banks – the US 2-year even managed to poke ata the highs of the cycle overnight and short EU Yields have jumped back aggressively, perhaps in part on the ECB’s Holzmann calling for two rate hikes this year from the ECB, saying that it is possible to hike rates before ending bond purchase (makes the most sense to me) and that a 1.5% ECB policy rate is realistic by 2024. Also, EU rates should have higher beta to risk sentiment linked to geopolitical tensions relative to the US, etc. The ECB’s Villeroy was out this morning calling for more “flexibility” which seems code for the willingness to move more quickly on rates eventually if inflationary outcomes are far higher than forecasts (while also buying optionality in the opposite direct if the economy tanks on the ongoing energy price spike).

The RBNZ surprises with hawkish rate forecast The RBNZ hiked the policy rate 25 basis points as expected, which took the Official Cash Rate to 1.00%, but the guidance was far more hawkish than expected, as the forecast for the OCR by the end of 2023 was raised to 3.25% from 2.50% previously. This was a slightly jarring upshift in hawkishness after a prior modest downshift in tightening expectations and the kiwi responded with a bit of strength as 2-year NZ rates lifted 10-12 basis points overnight. AUDNZD is under a bit of pressure, but the up-trend will stay healthy as long as the price action remains north of about 1.0600.

Chart: EURCHF
EURCHF has bounced back strongly, but still looks one bad headline away from plunging back toward the 1.0300-50 cycle support, but the longer the situation in Ukraine fails to escalate further and the more yields attempt to rise again in Europe, the more support we will see for a move back higher, with the longer term concern that the energy/power crunch in Europe has crushed growth prospects for the foreseeable future if these prices don’t come down quickly. In this morning’s Saxo Market Call podcast we discussed the fact that higher energy prices have been baked into the economic cake through at least next winter in the forward market.