Weekly Brief

Capitulation

GBP

The pound’s sudden fall from grace has accelerated through this week. Stung by those comments from the BoE last week on the very real prospect of an impending UK recession, and with little assistance from UK economic data, the political landscape, or even a risk-on market, the pound has been left to fester for the most part.

The latest GDP print, which covered Q1, and was released yesterday (Thursday) morning, missed estimates, with only a 0.8% gain versus around 1% expected. Whilst it can hardly be described as a catastrophic miss, given the relative apathy surrounding the UK just now, any bad news just gets magnified. The big worry now is that the BoE’s prediction of possible negative growth in the UK by the end of this year, might get an earlier bus ride into town. This is all especially worrisome, when you consider that inflation is at levels not seen since the 1970’s.

The actual GDP report was probably a bit worse, reading between the lines. GDP actually declined by 0.1% between February and March, only January saved the report from looking much weaker. So, this loss of momentum has arrived despite the cost-of-living crisis accelerating. The prime Minister, speaking after a cabinet meeting in Stoke, said that the economic data was ‘encouraging’, which is one way of describing it.

The latest Labour report for the UK is out next Tuesday. Any sudden weakness here will send the stagflation brigade into overdrive. Their cries will be intensified if the CPI inflation reading a day later increases yet again, as is expected.

As for the pound, well GBP/USD has now broken below 1.2200, and is within earshot of the 1.2000 psychological region, so markets may be tempted to explore the region. GBP/EUR has fared somewhat better, and has broken back over 1.1760, which is as much to do with an even weaker EUR/USD (see EUR).

 

EUR

The ‘will they, won’t they’ debate on whether the ECB finally raise Euro-area interest rates for the first time since 2011, looks to be finally coming to an end. ECB Head, Christine Lagarde, pretty much said as much this week, after admitting that the move can come just ‘a few weeks’ after the ECB finish their bond buying programme in Q3.

So, after a plethora of ECB officials waxed lyrical about a potential rate hike, Madame Lagarde finally put her weight behind a move. July looks a nailed-on bet then. It is fascinating to see just how much the landscape has altered since last November, when the ECB were telling us that there was little chance of an ECB rate hike this year.

So, why is the single currency not rallying then?  That bit is all about the frequency of hikes projected by markets. With the fed seemingly prepared to raise rates by at least 50 bps at each meeting until they manage to calm inflation, both the Fed’s possible neutral or terminal rates look like being way ahead of the ECB, even if the ECB do make a move in July. Given the time since their last hike (11 years), it is entirely likely/understandable that the ECB will only move again once more this year. Hence the weaker EUR/USD. On that note, having defended 1.0500 for such a long time. EUR/USD finally broke lower under the pressure of an inflation-busting greenback., not coming to a halt until it had moved under 1.0400.

 

USD

Heads you win, tails I lose. The greenback can do little wrong at the moment. On days when markets get updates from the Fed telling us how much they want to keep raising U.S rates until inflation starts to calm, the dollar rallies. Then on days when we get better than expected economic data, such as this week’s CPI inflation report, the dollar rallies. Then on days when the both the Bond and Equity market is in a risk-off mood, because that is what markets do some days, the dollar rallies. We could carry-on, but you are probably getting it by now.

That U.S inflation report really did have a big impact across the asset base. Markets had been vying for a bigger correction, given analyst expectations, with much weight put on the year-on-year print likely to weaken, given the big jump in April 2021 inflation. There was a pleasant rally leading into the release. However, the month-on-month core reading, which was up by 0.6% against a 0.2% - 0.4% expectation, and the less-than-expected declines elsewhere, left the markets disappointed. The angry sell-off that ensued exhibited just how frustrated markets were.

Whilst the declines in currencies versus the dollar were far more sanguine given the declines in asset prices elsewhere on the day, the dollar still managed to break above some key levels of resistance (see EUR and GBP). The dollar index also broke above 104.50, and is now trading at a cycle high.

USD/JPY was the only standout loser for the greenback. Having ventured up above 130.00 fairly rapidly over the past few months, the pair has now slipped back under 128.50. That is as much to do with the drivers behind the declines the other day, which can be attributed to a broader risk-off environment in markets, as anything.

The latest Retail Sales figures are the big standout economic release from the U.S next week, plus the latest Housing data. The Housing data is growing in significance given that mortgage applications have started to wane, as a consequence of the recent fed rate hikes. Any signs of weakness in U.S data will be closely monitored given the Feds objective on rates.

 

CAD

USD/CAD reached an 18-month high above 1.3000 this week, as a combination of a stronger greenback, and some wobbles amongst commodity prices, combined to drive the Loonie lower here.

We have touched on the greenback’s story in some length above, but the Loonie’s correlation to the price of Oil has been a bit sporadic at times this week, and was unable to benefit from the rally back over $100pbl in Oil prices (Thursday). Perhaps the $100 level is losing its significance, and we would need to see a much bolder move in either direction to meaningfully impact the Loonie.

As we often say, to judge the Loonie properly, you do really need to look beyond USD/CAD, as markets just do not feel that the BoC will ultimately reach a similar terminal rate as that of the Fed, and that is perhaps one of the main reasons why USD/CAD is where it is at the moment.

Elsewhere, it is a different story, with GBP/CAD and EUR/CAD both still seeing the Loonie near recent tops. Next week’s Canadian inflation report is likely to have a direct impact on whether these rallies can persist in the short-run, as markets continue to favour further 50bps rate hikes from the BoC over the coming months.

 

AUD & NZD

Little more than a month ago, the AUD was amongst the top, if not the top performing G10 currency for this year. AUD/USD had just pierced 0.7600, and there was talk of higher highs. This week, AUD/USD moved back under 0.6900, which represents a two-year low. What happened there? Well (you guessed it) the main driver to that move has been the strong greenback (again). What a difference a month can make in markets. This is all the more compelling, given that the RBA have also recently hiked Aussie interest rates for the first time in 11 years, despite the impending General Election in Australia. Looking ahead, next week’s RBA minutes (Tuesday) will be closely scrutinized for clues as to the RBA’s next moves, given that RBA hike. Thursday’s employment is also key.

The kiwi has followed a similar pattern to the Aussie, with NZD/USD slipping back toward 0.6200 this week, having flirted with a break over 0.7000 at the beginning of last month. The kiwi has probably been the worst performing currency (amongst G10) throughout April. The reasons behind that move look a little cloudier, given that markets are still pricing in around 230bps worth of rate hikes from the RBNZ over the next 9 months. Either the market is wrong here, and they will need to remove some of those expected moves, or the Kiwi will likely correct at some point.

 

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