Australian dollar turns Japanese as shorts pile in
David Llewellyn-Smith | Mar 27, 2023 09:47
DXY was strong Friday night:
AUD was weak. EUR was even weaker:
AUD shorts are piling in:
Commods sagged:
Miners (ASX:RIO) firmed:
EM stocks (NYSE:EEM) fell:
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Junk (NYSE:HYG) too:
Treasuries were bid:
EUR stocks fell, USD lifted:
Trade was dominated instead by fears about Deutsche Bank (ETR:DBKGn). Behind that US and European services PMIs were strong. The to and fro between US and Eueop macro regimes is the dominant macro factor in FX at the moment. Credit Agricole (EPA:CAGR) has more:
The benign market reaction following the FOMC and the loosening of tensions in the banking sector emboldened several ECB speakers to venture beyond the pure meeting-by-meeting approach and shift the communication back to the ECB’s primary mandate. Overall, the resulting message remains firmly on the dovish side, especially regarding the size of the next hike(s). The less forgiving financial conditions combined with the persistent stickiness of core inflation forced a re-convergence of the different stances: more rate hikes will be required compared to what doves were advocating, while said hikes will be smaller than what the most hawkish members were advocating.
Two prominent members of the kettle of hawks joined this middle–of-the-roadstance: Klaas Knot stating “I still think that we need to market another step in May, but I don’t know the size of that” and Robert Holzmann, which somewhat isolates Joachim Nagel’s stance that “to tame inflation, we have to be bold and decisive”.
Markets have been quick to follow through on the downshift rhetoric, with ease since it is a global trend. The BoE hiked the bank rate by 25bp to 4.25%, following a 7-2 vote where the two dissenting members preferred a status quo. The 25bp is the smallest hike since June 2022. The statement strongly suggested the peak in BoE bank rate is close and that further tightening would need “evidence of more persistent inflationary pressures”.
Forwards continue to embed a 4.5% terminal rate, which implies one last hike at the May MPC meeting. While we maintain our bearish expectations on EUR and USD Forward OIS, we prefer to express these by selling the Sep23 Euribor, rather than outright paying the 1Y1Y swap, due to the renewed negative Equity Bond correlation (Figure 1), with yesterday’s Schatz ASW widening in the wake of the US Treasury Secretary JanetYellen’s comments and bank stocks’ underperformance highlighting the persistent anxiousness.
One gets the feeling that the Fed and ECB are running to a standstill in the sense of spread advantages.
JPY might be shaping as the FX safe haven of choice, at the risk of running the YCC gantlet. Some reassurance can be found in the BOJ not suggesting any material change is in the offing and inflation is ebbing.
Assuming we do get an ongoing credit tightening and recession that flip-flops over the Atlantic, JPY will rally versus AUD:
Written By:
David Llewellyn-Smith
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