Thursday, 28 April 2022
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•          The dollar takes no prisoners these days. The past 5 trading days ended with impressive gains and this morning’s price action shows no signs of slowing. The trade-weighted greenback since last Thursday rose from 100 to 103.50, taking out the 2020 top in the process (102.98) and having the 2017 top (103.82) within reach. We need to go back to 2002 to see even stronger DXY-levels. EUR/USD sinks below the 1.0636 2020 bottom to currently trade near 1.05. In no time, we’ll arrive at the 2017 bottom of 1.0341. Last week’s IMF panel discussion was another eye-opener. FOMC Chair Powell’s determination to both tackle high inflation and restore credibility in stable inflation expectations marked a stark contrast with ECB Lagarde’s unwillingness to join the growing chorus of ECB governors arguing in favour of a hard QE-stop in June in order to hike policy rates in July. Look where Lagarde’s “looking at the data” brought us. We warned before that the euro would pay a high price if the ECB extends its ostrich policy. A weaker currency in combination with additional (imported) inflation pressure. The ECB gets its next reference tomorrow with April CPI data. Dollar strength is reflected against other majors as well. GBP/USD loses the 1.25-handle this morning with USD/JPY trading above 130 for the fist time since 2002 after the Bank of Japan this morning doubled down on its yield curve control commitment (see headlines). USD/CNY rises north of 6.60 for the first time since end 2020.
•          The correction higher in core bonds stalled and even went into reverse on the US Treasury market. After this week’s China scare, focus returns to next week’s FOMC meeting. US yields added 9.3 bps (30-yr) to 11 bps (10-yr) across the curve. The German yield curve steepened with yield changes varying between -5 bps (2-yr) and +1.7 bps (30-yr). European outperformance was also related to the Russian decision to halt gas deliveries to Poland and Bulgaria because of non-compliance with RUB-payments. Gas prices surged at the start of trading but reversed the largest part of that move. Today’s eco calendar contains US Q1 GDP figures and German inflation (amuse-bouche for tomorrow’s EMU CPI). Speeches by ECB governors de Guindos and Wunsch are planned. Both are amongst the July rate hike camp. Given the freefall of the euro, we wouldn’t be surprised to see unscheduled ECB comments as well. Especially the more hawkish governors will feel the need to do something. Too little, too late for now.

News Headlines

•          All or nothing. The Bank of Japan pressed ahead with its yield curve control programme, offering to buy an unlimited amount of bonds to keep the 10y yield anchored near 0% (+/- 25 bps) every business day. It kept the short-term policy rate unchanged at -0.10%. Some market participants speculated the central bank would have taken action against the ongoing slide by the Japanese yen and to allow for some more flexibility in the 10y yield after hovering near the upper bound in recent weeks. A string of verbal interventions from (mostly government) officials helped shape such expectations. But with inflation expected to cool from the 1.9% this fiscal year (up from 1.1% expected in Q1) to 1.1% in the two following years, the BoJ concludes easy policy remains necessary. GDP growth was revised down from 3.8% to 2.9% this FY but up for the next (1.9% from 1.1%). A disappointed yen takes another hit this morning. USD/JPY surges to 129.86. The 2002 correction high (135.15) comes closer.
•          Germany dropped previous opposition and is prepared to back an embargo on Russian oil, Bloomberg reported. The news followed Russia’s decision to halt gas flows to Poland and Bulgaria after both failed to pay for it in rubles. The ban would need to come with a transition period though. The EU is currently working on another package of sanctions. Formal proposals, including an oil embargo, could be put forward for approval next week. Oil rebounded from intraday lows in the wake of the Bloomberg report before losing those gains again in early Asian trading today. Brent oil trades just shy of $104/b.


European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. Net asset purchases will end in June, with a first rate hike likely in July. Runaway inflation expectations suggest the ECB’s response will still be too little, too late. Next resistance stands at 1.06% (2015 top)-

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. The US yield curve extended its bear flattening trend. Quantitative tightening will start soon (>=$95bn/month). The psychologic 3% resistance holds for now.

EUR/USD’s decline accelerated with the pair rapidly taking out the 2022 (1.0806) and 2020 (1.0636) bottoms. EUR/USD 1.0341 (2017 bottom) is the final stronghold before parity. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubt starting to filter through in markets. EUR/GBP bounced off the 0.82/0.83 support zone. The YTD high at 0.8512 is first meaningful resistance.

Calendar & Table

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This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA).
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