Chief Macro Strategist
Summary: The euro fell to new lows today, nearly touching 1.0800 versus the US dollar, as a fresh spike in energy and power prices further threatens the outlook for Europe. Still, the euro feels ever so slightly resilient today relative to the magnitude of the move in other markets. Are we reading too much into the situation or is the market becoming more cognizant of the widening potential for economic and financial damage stemming from this crisis?
FX Trading focus: Euro still weak, but diminishing returns for bears on fresh developments?
A new blast higher in crude oil prices hit markets out of the starting blocks overnight after the weekend apparently saw US Secretary of State Antony Blinken discussing a ban on Russian crude oil imports with European allies and Japanese sources spoke of similar talks. Self-sanctioning has already rapidly outpaced the level of official. The usual European and peripheral currency suspects that have been bearing the brunt of the impact from the backdrop continued lower today. However...
After lunch-time in Europe today, a Kremlin spokesman issued a statement indicating that Russia could cease military operations quickly if Ukraine would agree to recognize Crimea as Russian and the two eastern breakaway regions of Ukraine as independent countries, but also only if Ukraine agreed to amend its constitution and not join NATO or the EU, etc… It seemed to generate market interest and a bounce in market sentiment, even if it doesn’t look like a major change of Russian position. Regardless, the euro rebounded solidly to above 1.0900 before dropping back a bit as of this writing after nearly trading to 1.0800 less than an hour before. It may be too early to read anything into this, but the price action looks a bit less dire here, especially relative to the energy in other markets. Let’s hope the market is on to something. If so, a careful way to trade remains long call spread strategies in EURUSD for example – perhaps 1- or 2-months out (the call spread approach lowers the price at which the position becomes profitable even if it caps overall upside potential). If something more promising develops – a proper ceasefire to start, hopefully a Russian pull-back to follow, etc., the turning of the tables could prove incredible steep and decisive. Pointing this out just to remind readers how far these trades have stretched and the scale of the potential for rapid mean reversion under the right circumstances – it is not a prediction that we are set for an improvement in the situation on the ground in Ukraine, even if we ardently hope that is what we’ll get.
Chart: EURUSD
Expectations for the ECB meeting have shifted radically since the Russian invasion of Ukraine, as we expectations that the bank was set to announce a major overhaul of its guidance were wiped away when Russian troops invaded. Instead, we are likely to get an ECB that will delay its QT plans and issue far more “conditional” guidance on the inflation outlook that will depend on a drastically changed geopolitical and energy/power price situation. Still, the bank could surprise expectations with some far higher longer term inflation forecasts that, despite conditional guidance would likely accentuate the reaction function to any (hopefully) positive Ukraine-linked headlines. Technicals are far less relevant than headlines here, but a proper recovery indicator would require the price action to vault all the way back up in the 1.1200+ area.
Elsewhere, can’t help but notice that as the Euro recovered smartly from the lows, the Aussie was been capped and trading rather sharply lower off the fresh earlier highs overnight versus the US dollar. This could be the flip-side of potential evidence of a bit of exhaustion in these trades, or simply some position reduction ahead of the Thursday ECB meeting (discussed in the EURUSD chart caption above).
The global economy cannot afford ever higher commodity prices unless money supply grows rapidly from here to accommodate them – certainly possible longer term but not seeing any plans for a big new fiscal pulse from the key player: the US. That means that real growth will take a hit as other sectors of the economy must be reduced, eventually meaning recession. Germany and other European countries are set to increase fiscal for new defense priorities. Note long yields coming back higher as well, which are increasingly weighing on the Japanese yen, as the Bank of Japan has shown zero willingness to change its tune on the policy outlook.
The strong payrolls data but weak average hourly earnings data plus the market uncertainty will likely allow the Fed to hike only 25 basis points without much fuss next Wednesday, although it will be interesting to see whether the US February CPI prints with the first “8-handle” since 1982 on Thursday (expected 7.9%, and much of the rise in oil prices has happened since March 1).
Again, my favourite pair for expressing a constructive view that things will turn out alright eventually is short EURCZK as the Czech central bank has enormous firepower and a willingness to use it (intervened Friday) and has also moved aggressively to hike rates, already offering 500 basis points of positive carry.
Table: FX Board of G10 and CNH trend evolution and strength.
Earlier today, the well-embedded trends deepened further, with some snap-back mean reversion in places later in the session today. With a reading like -9.8 in SEK, we can’t help but wonder if we are nearing the end of the potential for a further extension of these trends.
Table: FX Board Trend Scoreboard for individual pairs.
Again, incredible extension in some of the trends here – AUDSEK registering a +15.8 – these are rare events indeed. The trends that are “flipping” are those USD pairs that have never gotten going anywhere of late: USDJPY, USDCAD, USDCHF, so little at stake yet there.
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