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USD: The pre-eminent safe haven right now
What initially looked like a benign end to the week after some encouraging US jobs data quickly reversed on Friday evening when Russia’s Gazprom announced it would be indefinitely suspending gas flows through its Nordstream 1 pipeline. While European nations have made progress towards their gas storage targets, such a complete, early withdrawal of Nordstream 1 supplies is likely to see European natural gas prices surge today and European equity markets resume under heavy pressure.
Over the weekend, authorities in Finland and Sweden announced liquidity guarantee schemes for large utility companies, making reference that they did not want an energy crisis to turn into a financial crisis. We have not yet really seen financial stress indices such as the 3m Euribor-ESTR spread start to widen appreciably. But understandably, international investors are looking to steer clear of European exposure at present.
Offering 2.3% overnight deposit rates and backed by near energy independence and a relatively strong US economy, it should not be a surprise to see the dollar remaining bid. As we noted last week, we doubt the Japanese yen offers much of a safe haven at the moment given the nature of the crisis wiping out Japan’s trade surplus.
For the week ahead the US data calendar is light, but we have several Fed speakers including Chair Powell on Thursday. Equally the G10 has several big central bank meetings including the European Central Bank (ECB), Bank of Canada (BoC) and Reserve Bank of Australia (RBA). All should be considering rate hikes at least in the 50bp region, if not 75bp. These size hikes can offer some support to respective currencies – but look unlikely to turn core FX trends around.
DXY is now comfortably through 110 and 111.30 looks to be the next resistance area. Don’t fight the trend here.
EUR: Trial by gas
The gas news has sent EUR/USD to a new low for the year and it is not obvious where the next support levels exist – perhaps 0.9850 and then not until the 0.9600/9650 area. There is a risk of moving into ‘fast markets’ and understandably EUR/USD implied volatility is turning bid again.
Our German macro team feels that the weekend package of support measures to the German economy does not go far enough – worth just 2% of GDP compared to 15% of GDP levels of support seen through the pandemic. Equally, we think a 75bp hike at Thursday’s meeting is a leap too far for the ECB – we look for 50bp. This will not help the euro either.
EUR/CHF should turn lower again after its recent spike higher. We expect the Swiss National Bank to be intervening on both sides of EUR/CHF now. But given the SNB’s recent hawkish shift, we do not think it would have a problem with EUR/CHF at 0.95.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.