On Thursday last week, the ECB disappointed Euro bulls as they entered a four day weekend. They were hoping for something more than an almost unchanged valuation, especially after inflation in March again surprised on the upside. Between the lines we still read that a take-off in July rates is certainly possible, but the euro needed greater clarity signal. EUR/USD fell from an intraday high of 1.0923 to below 1.08 but managed to close again above (1.0828). It only postponed the inevitable. The pair in the days that followed, albeit in low volume trading, loosened further. Since this morning, EUR/USD is trading in the 1.077 area; a support zone marked by the corrective lows of February-May 2020. In the event of a break, we envisage a return to the pandemic low of 1.0636. It seems more and more likely, especially with Fed governors now starting to talk about 75 basis point rate hikes. The governor in question, Bullard, said that wasn’t his base case today, but remember that 50 basis point moves weren’t anyone’s either, until recently. EUR/GBP’s moves were similar but less dramatic from a technical standpoint. The pair lost 0.83 but moved away from the 2022 low. They even staged a minor bounce after hitting support at the lower boundary of the downsloping trend channel at the current 0.82 high area. . The interest rate markets behaved in an interesting way. The European front-end eased a few basis points in the wake of the ECB, leaving the markets still a little unclear on the timing of a first hike. The German 2-year rate approached 0% but a return to negative territory was never really an option (0.05%). The 2-year Europe swap ended at 0.70%, down 3 bps. The long end, however, underperformed sharply. steepening (Rise of 8 bp in the German 10-year rate or 9 to 10 bp in swaps) inflation expectations remain on the rise. The markets consider the ECB too slow to react. Depending on the gauge, the indicators melt to cycle/multi-year highs or even series highs. Reports (from the NYT) that EU moves towards adopting phased ban on Russian oil obviously add to such movements. In just five days, Brent went from $100 to $113/b currently. Yield momentum also puts EUR/USD weakness in perspective since inflation expectations in the United States have leveled off. Real returns are the driving force. The 2-year yield stabilized around but below 2.50%. The 10-year yield, however, yesterday hit a new cycle high of 2.85% and the 30-year yield is within 6 basis points of the 3% benchmark. This is also what is crushing the Japanese yen: USD/JPY soars above 128 this morning to hit a 20-year high. We see little reason for current yield trends to reverse dramatically at this time. As such, there is also no king dollar stoppage.
In the minutes of the April policy meeting, the Reserve Bank of Australia indicated that the time was approaching for conditions to be met in order to raise its key interest rate. The RBA sees core inflation breaking above the inflation target range of 2% to 3% in the first quarter and further upward pressure is likely. The RBA also sees wage growth is accelerating, but that’s still growing at a pace that’s likely below rates consistent with sustainably on-target inflation. The Bank will closely monitor other important data relating to both inflation and the evolution of labor costs. Markets are pricing in a first rate hike for the June 7 policy meeting. The Australian 2-year rate rose 7.8 basis points to 2.11% this morning. The Aussie dollar rebounded slightly from the recent correction to trade near 0.7370.
First quarter economic data released in China yesterday painted a mixed picture. GDP growth unexpectedly fell from 4.0% Y/Y to 4.8% Y/Y YTD. Industrial production has fallen to 6.5% since the start of the year, Retail sales growth slowed from 6.7% year-to-date to 3.3%. The March figure even fell to -3.5% year-on-year. The surveyed unemployment rate also unexpectedly jumped from 5.5% to 5.8%. The real estate sector faces continued headwinds (year-to-date residential property sales down -25.6%). In a report, the PBOC announced a series of 23 selective measures to support the economy. Among other things, the package includes on-lending programs making funds available to banks to continue financing sectors affected by the lockdowns/consequences of the pandemic. The Bank also recommends that banks continue to support the financing of local authority projects and other major investment projects. So far, the bank has not signaled any RRR cuts or a broader rate cut.