The UK ‘mini’ Spring budget Statement this week had been eagerly anticipated by markets and consumers alike. The latter needed the Chancellors help, and the former knew this a long, long time ago. The challenges facing the Chancellor are wide-ranging. He needs to pay all that COVID-accumulated government debt back, against an extremely challenging backdrop, which is getting harder, given those rising interest rates.
As we know, the BoE are being stirred into action by higher inflation, which is causing the consumer a cost-of-living crisis not seen since the days of farthings, shillings and flared trousers. That is all without even considering the potentially negative implications of a global economic slowdown, itself possibly fuelled by the ongoing war in Ukraine. Tightrope walking indeed.
In the end, the mini-Budget lived up to its name. Rishi kept some spare change in his pocket, in case he needs it down the road. There were some treats to be had, such as petrol will be a (bit) cheaper, and some of us will benefit from a higher national insurance threshold. He also promised to cut income tax before the next election, which is in 2024. However, when you consider that the latest UK Inflation saw CPI reach 6.2% (YoY), the Bank of England may have to raise those UK interest rates for a fourth time pretty soonish. That move would again substantially increase the government’s debt interest charges. So, whilst the Budget left us feeling short-changed, the cautious approach is perhaps prudent. However, the cries for more targeted plans to help those most in need will not be going away anytime soon.
The pound didn’t really move around much on the Budget, and that is perhaps to be expected. Sterling is far more interested in the broader market sentiment, and that was for the most part, in a positive mood this week. So, GBP/USD remained steadfastly above the key 1.3000 psychological level. GBP/EUR ventured back above 1.2000, but has been unable to maintain that key region for any reasonable period of time. Next week’s GDP figures are the standout for me, but given their somewhat backward-looking nature (it is all about Q4 2021), the pound may again react more to how the broader markets are faring on the day.
Having been the centre of attention over the past month, the single currency settled back into a far more restrained range against the majority of its peers throughout this week. Developments in Ukraine will always impact broad market sentiment, but they will especially impact the single currency. With frustratingly little ‘new’ news on that front, the tone was set.
ECB Chief, Christine Lagarde, dismissed risks of stagflation in her recent speech this week. Whilst highlighting the risks of rising inflation for the region, she also noted that the ECB’s monetary policies will not be in sync with Fed. However, markets have not ruled-out the chances of a possible ECB rate hike by the end of this year, and if those cries accelerate, expect the single currency to react.
So, in the end, EUR/USD has gyrated around 1.1000, lacking clear impetus. Next week might be a different story, with a plethora of Euro-area data releases due, markets will have much more bait to go fishing with. The Euro area HICP inflation print is one to watch in particular. Inflation is expected to reach 6.3%, which will give the ECB plenty of food for thought ahead of their next meeting.
Now that the Fed have hiked rates, they look to be in a real hurry to hike some more, and quickly. There was even the open talk of hiking 50bps in one go if needs be. Every Fed member who I have heard of, and even some I haven’t, were on the wires this week, telling us the Fed’s thinking. The Fed cannot be accused of not informing us all. Why the hurry though? Well, they need to make hay whilst the sun is shining, and hiking rates against a weakening economy does not look pretty. The bond market has had its worst month since Trump was elected, as a consequence of all this chatter.
All key U.S economic data will be key going forward then, and next week, we get the Labor data for March. Markets will get nervous and disbelieving if the cumulative data does not stack up.
As for the greenback, well the dollar moves have been far less one dimensional this week. Against the likes of the JPY, that ever-expanding interest rate differential has funded a rally to levels not seen for six years. Having broke over 120.00, the pair then accelerated to 122.00. However, it has not all been one-way traffic, and the likes of USD/CAD (see CAD) have provided some resistance to a more broader dollar rally.
USD/CAD hit 1.2870 last Tuesday, and yesterday it reached a 1.2500 low. That near 400 pip rally for the CAD really is impressive, especially when you consider that the Fed have hiked rates in the middle of this period.
Part of the rally is down to the markets growing expectation of rate hikes from the Bank of Canada. Markets are marginally tilted toward a 50bps hike at the 13th April meeting, and total hikes reaching 175bps by year-end. Big numbers indeed, and that puts the BoC ahead of the Fed. With commodity, and in particular Oil prices persistently high – they were well over $115pb yesterday, the BoC may be swayed.
However, much like the UK, Canadian consumers carry a fair amount of debt, so the BoC will still need to tread carefully. We could end up with markets repricing some of that 175bps out, inflation expectations notwithstanding. In the meantime, USD/CAD is within a whisker of the yearly low. The annual Budget release is one to watch next week.
AUD & NZD
Much like the CAD, and unlike the JPY, the Aussie continues to power higher against the greenback. AUD/USD reached a five-month high above 0.7500 yesterday, and strong commodity prices coupled with a settled market, have been the key drivers here. Australian economic data has played a part here too. Stronger than expected employment caught the eye, with the Unemployment rate now at 4% - representing a 14-year low, whilst the employment change nearly doubled market expectations at 77.4K. Impressive.
So, it is no wonder that the market continues to price-in rate hikes from the RBA, given those lofty commodity prices and strong domestic data. Despite all of this, the RBA might still want us to retain a degree of caution. Let’s see if they change their minds on that soon.
NZD/USD nearly broke over 0.7000 yesterday. Much like everywhere else, domestic inflation expectations have risen rapidly over the past year in New Zealand, and calls for aggressive rate hikes over the next couple of months have been growing. This is helping to fuel the fire in the Kiwi.
One to watch... NOK
Much like the CAD, the NOK ‘Nokkie’ will be led, in part, by how Oil and broader commodity prices are faring. This relationship is especially significant when Oil is trading at/near historical high or low points. In response to those high prices and increasing inflation in Norway, the Norges Bank raised the key policy rate yesterday from 0.5% to 0.75%. However, they also delivered what market would refer to as a ‘hawkish hike’, suggesting that there are more hikes on the way. Ukraine war worries aside. This has led to USD/NOK sliding to lows not seen since last November at 8.6000, giving the NOK a real boost.