FX Update: Euro and periphery extends bounce, aided by risk sentiment.

RBA Governor Lowe was out overnight speaking on the state of the Australian economy and the outlook for monetary policy, even with helpful charts. The focus is on everything from Australia’s so far relatively muted inflation outcomes (hmmm – don’t we need a look at Q1 CPI…?) which are in part due to less volatility in domestic energy prices and a less heavy-handed fiscal approach during the pandemic than, ahem, the USA. The speech recognized the rise in Australia’s terms of trade from the enormous mark-up in the value of its commodities exports, but says that much of the swell in corporate profits for extractive industries and related tax revenues for the government will be offset by margin pressures for other companies and a pinch on household budgets, so that the aggregate national income increase will be saved more than spent. On monetary policy, the RBA is still quite balanced, modestly concerned with both moving too late and too early. Wages are a primary focus and have not accelerated or suggesting any risk of a wage-price spiral, even if Lowe expressed a bit of insecurity that the bank doesn’t have modern experience of how wages will behave at anticipated new lows in the unemployment rate. The other area of insecurity was whether the new supply side shock could destabilize inflation expectations, something it will be watching for carefully. In terms of actual rate hike guidance, we only get the indication that the bank anticipates hike rates “later this year”. Interestingly, the market is pricing the risk of far higher rates by year-end, with lift-off as early as the June meeting and five hikes through the December RBA meeting.

Yesterday, the National Bank of Poland hiked 75 basis points to take the rate to 3.50%, this versus the 50 basis point hike expected. It backed up the move with the threat of intervention if PLN volatility persisted. The timing was perfect for maximum impact, given the recovery in the euro yesterday (a better outlook for the euro and stronger risk sentiment in euro usually feeds through to even more strength in CEE currencies and SEK, for example) after EURPLN touched the 5.00 level for the first time since the 1990’s-era redenomination. Governor Glapinski will hold a press conference just after this piece goes live.

Table: FX Board of G10 and CNH trend evolution and strength.
A change of pace is rapidly unfolding now across FX as gold has lost tremendous altitude today after a huge run-up, while the euro has surged and peripheral euro FX even more so (see the SEK +2.8 change of 2-day momentum), while safe haven currencies have reversed – this is a significant mean reversion even without any improvement on the ground in Ukraine. Tomorrow’s ECB meeting is likely to tell us how much of this was merely position squaring ahead of the ECB meeting.

Table: FX Board Trend Scoreboard for individual pairs.
Note the scale of the reversal in EURGBP relative to other Euro pairs – far more significant and a negative sign for sterling. Elsewhere, too early to draw conclusions in may places, but watching the top of the range in USDJPY and whether the AUDUSD bearish reversal was a red herring as the bounce back unfolds….

Today’s Economic Calendar Highlights (all times GMT)

• 1400 – Poland National Bank of Poland Governor Glapinski to speak
• 1500 – US Jan. JOLTS Job Openings
• 1800 – US 10-year Treasury Auction
• 0001 – UK Feb. RICS House Price Balance