Outlook: Markets would really prefer to be more risk averse but who can stomach the returns on cash and fixed income assets when inflation is so high? The tension in the air can be cut with a knife. Morgan Stanley notes the sell off in Treasuries has resulted in “flattening the 5s30s curve to 14b p, a new low since 2007.” This observation does not pass the “So What?” test. Fed chief Powell advised we look at the short-end of the curve only. Bloomberg today has the 3 month at 0.49%, the 6-month at 0.94% and the 2-year at 2.16%--nicely normal. Yield-seekers are glad about central banks in Brazil and Mexico front-running the Fed, although AMLO confused everyone by announcing the rate hike before it happened. At least in those two countries the short-term return has a sane relationship with inflation. You can’t say that about the US or the West generally. And weirdly—very weirdly—the yield diff might even be starting to become a factor in Japan. After a hint of inflation in Tokyo, the 10-year JGB yield was up almost to 0.24% from near zero where it has languished for months under the policy of yield curve control. This is more a “hmm moment” than an “aha! moment” but worth noting. The dollar/yen is at the highest since December 2015 and that can’t last. As noted before, old-timers are accustomed to drawing imaginary lines in the sand. At a guess. 125 is a number the MoF and BoJ will not like. It’s almost impossible to convert some observations into trading ideas, but note that next week is month-end and quarter-end, and both can have an effect on position changes by the Big Traders that convert to crowd-following. We continue to see the market coming to accept the Fed is serious about taking ed funds to 2.25-2.50%, with the whole curve higher in lockstep. We can expect more rhetoric pushing sentiment that way. It’s hard to imagine this environment failing to be strongly dollar-supportive, especially with decent US hard data and Europe getting disappointing markers. Why the euro is not weaker is a mystery and a rather frightening one. But stay the course.  Russian Finance: Bloomberg reports the MOEX index fell 3.7% after climbing 4.4% yesterday, led by Gazprom. It’s pointless to watch equities in Russia when a big category of traders (foreigners) cannot sell and when short-selling is banned. Still, Gazprom fell on the news that Germany will seek to cut it out of its supply chain altogether by 2024, so some news is getting through to Russia. Ordinary Russians must be getting some hint when McDonalds and other Western names are closing down. Nobody thinks sanctions and the ruble/MOEX are going to change a single thing in Putin’s conduct, but let’s keep watching. This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes. To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!  

AUD/USD The Australian dollar remains well supported, with strong gains against Japanese yen, underpinning the AUDUSD pair. Aussie advanced around 5% vs the US dollar and 10% vs yen in past almost two weeks, as Japanese currency remains under pressure on dovish BoJ and soaring prices of commodities and energy, as the country heavily depends on imports. The daily chart shows that  AUDUSD price action is slowly running out of steam, on approach to key resistance at 0.7555 (28 Oct 2021 high) as the bodies of daily candles are getting smaller, while shadows are longer on both sides. Although the bullish momentum continues to strengthen, overbought stochastic adds to signals stall. Correction is likely to be shallow, as weekly studies are in full bullish configuration and the pair is on track for the second strong weekly gains and close above weekly cloud top that generates bullish signal. Good supports lay at 0.7441/17 (Mar 7 spike high / broken Fibo 76.4% of 0.7555/0.6967) with extension towards rising 10DMA (0.7385) not ruled out and expected to offer better levels to re-enter bullish market. Break of 0.7555 pivot would expose net key barrier at 0.7634 (Fibo 38.2% of 1.1079/0.5514, 2011/2020 downtrend). Res: 0.7536; 0.7555; 0.7600; 0.7634. Sup: 0.7477; 0.7441; 0.7417; 0.7385. Interested in AUD/USD technicals? Check out the key levels

USD/CAD traded lower yesterday, breaking below the key support barrier of 1.2560, initially marked by the low of January 26th, and tested again several times this week. This, combined with the fact that the rate is trading below the lower end of the sideways range that contained most of the price action from January 26th until March 17th, paints a negative short-term picture. We believe that, despite a subsequent bounce, the dip below 1.2560 may have opened the way towards the 1.2453 zone, which is marked as a support by the lows of January 13th, 19th, and 20th. If that key zone fails to provide support this time, then we may experience extensions towards the 1.2387 barrier, marked by the low of November 10th, the break of which could allow a test at the 1.2327 level, defined by the low of October 29th. Shifting attention to our short-term oscillators, we see that the RSI, although it rebounded from slightly below 30, it turned slightly down again, while the MACD, already negative, had also turned south and just crossed below its trigger line. Both indicators detect downside speed and support the case for further declines in this exchange rate. We will abandon the bearish case only if we see the rate returning back within the aforementioned range, in other words, breaking above the 1.2665 barrier. This may encourage some more advances within that range, initially towards the 1.2695 level, marked by the inside swing low of March 11th, the break of which could extend the advance towards the 1.2737 level, marked by the low of March 14th. Another break, above 1.2737, could aim for the 1.2785 zone, which acted as the upper end of the aforementioned range.  

RBA rate meeting – 05/04 – The RBA has been uncharacteristically dovish in recent months despite rising evidence that inflation is running well ahead of expectations. Governor Philip Lowe has gone to great lengths to play down the prospect of a rate rise this year, although at the last meeting he was careful not to rule it out. Unemployment has been falling while wages, as well as inflation pressures, have been increasing. As a major commodity exporter, the rise in wheat, oil and metals prices is likely to exert significant upward pressure on inflation in the coming months, which is a significant shift from the start of this year, when the RBA was insisting that a rate rise this year was unlikely. Events have moved on since then and the RBNZ has already started raising rates, leaving the RBA in its wake. This suggests the RBA could be closer to moving rates off their current 0.1% than at any time in the last six months. Expectations are still for a possible hike in June, however this still seems some way off and given the fluidity of the current situation it wouldn’t be impossible for the RBA to move at their April meeting, if only to anchor inflation expectations. Global Services PMIs (Mar) – 05/04 – The recent flash PMIs from Germany and France showed that despite rising prices services activity has remained resilient. This has come about as a result of the easing of covid restrictions more than any immunity from rising costs, which have shown little signs of slowing down. The rise in costs has also been exacerbated by the war in Ukraine, which is manifesting itself in rapid increases in the costs of doing business. Because of this companies will be faced with the prospect of passing these costs on, and while for the moment they seem able to do so that is likely to change as we move into Q2. Business and consumer confidence is already on the decline, and is likely to deteriorate further. As such this week’s services PMI reading could well be the last hurrah for the rebound in economic activity we’ve seen since the start of the year. France services PMI is expected to rise to 57.4 from 55.5, while Germany services is expected to come in at 55. In the UK services activity is expected to remain steady at 61, however in a worrying sign for the sector for Q2 inflation pressures in the sector are at a record high, and look set to rise further. Business optimism on the other hand saw a sharp drop in the recent flash PMI numbers suggesting that there is rising concern about the growth outlook over the rest of the year. A lot of the recent improvement in the last two months has been as a result of inventory rebuilding as businesses get ahead of rising prices by restocking while prices are lower. Fed minutes – 06/04 – As expected the Federal Reserve raised rates at its March meeting, by 25bps, although the decision wasn’t unanimous in that St. Louis Fed President James Bullard argued for a 50bps rate rise. His argument was that the Fed funds rate needed to be at 3% by year end due to core PCE being over 4% higher than the Feds target rate of 2%. While he is probably in a minority on this point at the moment, the Fed has indicated it wants to see another 6 rate rises this year, and that at minimum one of these is likely to be a 50bps move, probably in May. This week’s minutes should give us an indication as to how much events in Ukraine tempered the Fed’s response in terms of the increase in rates and whether there was a temptation to go harder than 25bps. The FOMC also upgraded their inflation forecast for 2022 to 4.3% from 2.6%, and in 2023 to 2.7% from 2.3%, while downgrading GDP to 2.8% in 2022 and 2.3% in 2023. The upward adjustment to the inflation forecast while significant is still well below the current level of 6.1%. Various Fed policymakers have indicated that a 50bps move is likely to be on the table in future meetings, and when you have the likes of a dove like Neel Kashkari of the Minneapolis Fed arguing the Fed would probably need to be more aggressive, then the calculus could well shift rapidly in the coming months if inflation proves to be much more persistent. US bond markets have already shifted sharply in pricing future rate hike expectations; however, they appear to be pricing the prospect that the Fed could well overtighten in its desire to rein in inflation risk. The nature of this week’s minutes could well reinforce that fear. ECB minutes – 07/04 – At the most...

As the conflict in Ukraine remains frozen for now, markets have started shifting their attention also to other topics, especially monetary policy signals. Despite volatile oil prices rising again to USD/bbl 120 after Russia demanded Rouble payments for gas, positive risk sentiment sent yields higher and equities held up. Bund yields rose above 0.5% for the first time since 2018 and 10Y US Treasury yields are now trading around 2.4% after hawkish comments from Fed chair Powell, which seemed to prepare the ground for a more aggressive monetary policy tightening ahead. EU leaders agreed on more joint gas buying going forward, although an embargo on Russian energy imports remains off the table for now amid German opposition. G7 leaders agreed to crack down on Russia’s ability to sell its gold reserves to support its currency and the US announced expanded sanctions against more than 400 Russian individuals and companies. Norges Bank (NB) continued with its gradual policy tightening and hiked rates by another 25bp this week, but we think the NB rate path will prove too aggressive and pencil in fewer hikes and an earlier top in policy rates (read more in Reading the Markets Norway - NB firms tightening signals but maintains 'gradual' pace, 24 March). In contrast, the Fed's new mantra seems to be "get to neutral as fast as possible", and a range of FOMC members this week talked about front-loading rate hikes, with none ruling out a 50bp at this point. With inflation still high and the Fed behind the curve, we see an increasing probability that the Fed will tighten more and faster than we have pencilled in (i.e. risks are skewed towards the Fed hiking by 50bp in both May and June or 75bp in one go). Tighter monetary policy (and financial conditions) and the commodity price shock increase the risk of a global recession 1-2 years down the road, which is also reflected in the ongoing flattening of the US yield curve. In Research Russia - EU embargo on Russian energy could be a game-changer, 23 March, we took a closer look at the economic implications from the war in Ukraine on Russia. The 'Fortress Russia' policies have already significantly weighed on households' living standards and the war ensures that weakness will persist for years to come. On a positive note, PMI figures for March suggested that the hit to the euro area economy from the Ukraine war might have been less than feared, calming immediate recession fears. That said, growth momentum in both manufacturing and services slowed and future output expectations have become more clouded amid renewed supply disruptions, weakening export orders and sharp rises in input prices. While Ukraine war developments will remain in focus amid signs of a stalling Russian advance, next week central banks will also get more data to assess the state of the labour market and inflation pressures. The US labour market report for March is due on Friday and we look for a decent report with jobs growth around 450k. In the euro area, flash HICP figures for March are released and we expect to see a further rise in headline and core inflation (to 6.5% and 3.0%, respectively) as higher input costs are still working their way up through the pricing chain, keeping pressure high on ECB to normalize policy. We see some downside risks for Chinese PMIs released on Thursday, following recent headwinds from COVID-19 outbreaks, property sector stress and the rise in commodity prices. Download The Full Weekly Focus

The war at Europe’s eastern border weighed heavily on the common currency, hurling EUR/USD back to levels not seen since the 2020 pandemic year. The focus returned to reigning market themes in the meantime. In this respect, the ECB’s hawkish shift protects EUR/USD’s downside. A solution to the geopolitical conflict may be required for the pair to start a sustained comeback. EUR/GBP remains trapped near YTD lows. Sterling/UK money markets do not buy into a cautious BoE normalization narrative. A 2% policy rate by year-end is discounted. As in EUR/USD, EUR/GBP’s downside is better protected though thanks to the ECB. Monetary policy divergence and higher core/US real rates launched USD/JPY to the highest levels since 2016. High commodity/oil prices weigh on the yen as well with Japan being a net energy importer. The currency fall-out of the war in Ukraine was the biggest on nearby countries, including in Central Europe. The Czech National Bank (CNB) intervened in FX markets to stabilize the koruna. The central bank will also raise rates more and keep them restrictive for longer than previously envisaged. Calm meanwhile returned, allowing the koruna to appreciate close to pre-war levels as the underlying fundamentals remain solid. The forint hit a record low of EUR/HUF 400. The central bank re-introduced the use of the weekly deposit rate to stem the currency’s decline. Along with improved sentiment, the forint pared losses to a still-weak EUR/HUF 370. The Hungarian central bank already announced a longer and more aggressive tightening cycle as inflation is expected to rise to even higher levels. The zloty was caught in the risk-off slipstream with a subsequent recovery as the dust settled somewhat. The NBP also intervened in the currency market. It hiked by a more than expected 75 bps in early March with more definitely to come. A significant comeback by the zloty (as well as the forint) is probably difficult as long as the war drags on. Download The Full Monthly Chartbook