FX Update: French election uncertainty weighs on the euro.

Next week is an interesting one for FX, with two G10 rate decision next Wednesday – the RBNZ and the Bank of Canada – with both expected to deliver hikes: 25 basis points to take the rate to 1.25% for the RBNZ and a 50-basis point move from the Bank of Canada. Guidance will be important, given the very steep pace of further tightening priced into the curve for these two central banks – the RBNZ approximately priced for a 3.2% rate by year end (!) and the Bank of Canada for 2.6%. By the way, the 5-year Canadian yield has reached its highest level in over 10 years after trading at record lows in 2020. This will administer a massive slowdown on Canadian house price gains in the coming year to eighteen months, as mortgages are generally based on 5-year rates. The same dynamic applies for the US, where the Fed’s intention to step away from MBS purchases has seen a sharp spread widening for the spread of US mortgage yields beyond the 30-year US Treasury bond. The US 30-year fixed mortgage is pushing on 5%!

The ECB meets next Thursday after a recent attempt by key ECB members to keep the outlook for policy from running too aggressively higher. This has failed to tame EU yields, with the German 2-year pinned near cycle highs today – a test lies ahead there for the ECB, but the French presidential election could be the dominant factor depending on this Sunday’s first-round result.

Russia cut its policy rate 300 basis points to 17% in the wake of the powerful “stabilization” of the Russian ruble, but this is irrelevant for foreign exchange except for those Russian exporters receiving fewer rubles now for their hard currency exports. You and I and Russian depositors can’t trade in and out of rubles due to sanctions and Russian capital controls, so the real market rate is a complete unknown and will stay that way until the situation normalizes, if it ever does so. Russia can continue to cut rates if it wants to due to the capital controls as this eases any pressure from the impossible trinity (a country can only control two of the following: free capital flows, independent interest rate policy, fixed FX exchange levels). By freezing all capital flows, the Russian central bank can set the other two levels wherever it wants.

Table: FX Board of G10 and CNH trend evolution and strength.
The Euro is weaker, but still managed to gain from day’s lows today against the yen as the latter obsesses over rising sovereign yields – a bit surprised that there is zero EU existential strain in EURJPY, only a bit in EURCHF. Commodity FX is stumbling rather badly on the consolidation in many commodity prices this week – so far just a breather, but watching chart levels for major pairs.

Table: FX Board Trend Scoreboard for individual pairs.
Some of the USD/commodity pairs starting to roll over – USDNOK can’t decide direction at pivotal levels, but NZDUSD looks a bit ugly – AUDUSD so far still hanging on to its up-trend. Note gold (XAUUSD) trying to make a move again to the upside after multiple recent failures – really needs to clear 1,966 and hold this time if trend-traders are to bite.