The ongoing worries surrounding global growth isn’t really helping the mood in oil at the moment and we’re taking quite a shave off the top after the spike towards $130 amid the Russian invasion of Ukraine in early March.The uneasy situation surrounding Shanghai isn’t helping with the outlook as China remains a major uncertainty at this stage. The technicals point to some support around $95 and the 15 March low at $93.56 but a drop below that is where things could get uglier for oil, despite a 4% decline to start the new week already.There won’t be much support towards $90 next before the 100-day moving average (red line) @ $88.51 currently comes into play.I outlined my thoughts on the oil market in this post last week. I still stand by the more bullish structural view with dip buys around $80 to $85 being where the value is at, barring major demand destruction.

Not much has changed since my earlier post at the start of the day here.
The bond market remains in charge of trading sentiment at the moment and the yen is being punished for it in European morning trade. USD/JPY is up 110 pips on the day now to 125.40 as buyers seek a firm breakout above the 125.00 level.
Here’s a look at Treasury yields:

2-year Treasury yields +6.4 bps to 2.584%
5-year Treasury yields +6.5 bps to 2.822%
10-year Treasury yields +5.6 bps to 2.771%
30-year Treasury yields +2.8 bps to 2.774%

And it doesn’t just stop there. It’s a global push as we are seeing 10-year German bund yields are at its highest since 2018 while 10-year French bond yields are at their highest since 2015. Meanwhile, 10-year JGB yield are also approaching the BOJ’s implicit yield cap at 0.25% once again.

The week ahead has
several events that have the potential to move the market. In France, the
presidential election is in the spotlight. Following the first round this
weekend, incumbent president Emmanuel Macron will face Marine Le Pen in the
election runoff.

 

There are fears that
Le Pen, who is seen as a representative of the extreme right, could receive
strong support, and a potential win might negatively impact France’s
relationship with the EU and NATO in the long term. With France being the
second largest economy in the EU, potential polls favouring Le Pen in the
runoff could have some impact on the European markets and the euro.

 

This week will also
see the release of several surveys in Europe, the US CPI m/m, the US PPI, the
RBNZ rate statement and official cash rate, the CPI y/y for GBP. The BOC and
ECB will both have press conferences and some comments from BOJ Gov Kuroda and
FED members are also expected. Friday is a bank holiday in Europe so low
volatility is expected as traders are heading into the Easter holiday.

 

The US CPI is
expected to rise again and it’s likely to add to FED hawkishness which could
boost the USD. The DXY is at the highest level in two years, and it could go
higher in the near term. 

 

RBNZ seems committed
to raising rates aggressively to keep inflation under control. Some analysts
believe there’s a possibility they overtighten and if this happens the bank
could be forced to reprioritize to limit the negative growth effect.

 

In the medium term
the prospects for NZD are bullish, but in the short term the NZD/USD H1 chart
looks good for selling opportunities. A correction is expected, and the first
level of resistance is at 0.6905. If rejected the next target could be
0.6729. 

At the next ECB
meeting the bank’s policy is expected to remain unchanged, but analysts at
Barclays believe that high inflation will likely pressure the ECB to signal its
future policy plans.

 

The stagflation
narrative in Europe seems to be the main theme at the moment with fears that an
economic slowdown in China and rising commodity prices will put pressure on the
euro area.

 

Citi analysts point
out that Europe „is facing the worst terms of trade shock since the 70s,
which opens up the risk of European recession this year — albeit their base
case is that this is narrowly avoided.“ If the ECB begins its policy
normalization it could support the Euro „if it slows structural outbound
European sovereign yields vs FX hedged USTs.“

 

EUR/USD has prospects
for further depreciation. From a technical perspective on the H1 chart we can
see a bullish divergence which means the pair can have a bigger correction
until 1.0970. If that level holds it can continue its descending trend with the
next targets at 1.0825 and 1.0760.

 

 

For the Canadian
dollar, analysts at Citi now expect 50 bp hikes from the BOC in April, June and
July this year, followed by 25 bp increments to reach 2.7% by the end of the
year. The CAD will also be supported by high commodity prices for the near
future.

 

However, the USD/CAD
closed near the 1.2600 level of resistance last week, and even if the overall
outlook is bearish, it’s possible that the pair could climb higher until the
end of the month. The next level of support is at 1.2525 and if rejected the
pair can go to test the resistance at 1.2650.

 

Despite favourable
conditions for the CAD, the USD was strengthened by the rising US yields and
more US data points like the CPI, PPI and Retail Sales are expected to show
gains for March, which will further support the USD.

 

According to analysts
at Scotiabank, the upcoming BOC policy statement, the monetary policy report
and Governor Macklem’s press conference will have a hawkish undertone for the
CAD, but „there’s a risk that either a) policy makers fail to deliver what
is already priced in for the next week or b) do not prove sufficiently hawkish
guidance to justify what the swaps curve have priced in for the coming
months.“ The analysts advise a neutral stance on CAD until more
developments this week.

 

 

As for other
currencies, GBP remains bearish in the near future with the mention that there
are usually some strong seasonal performances for GBP in April that may be
linked to fiscal and dividend impacts. For the last few years, the GBP/USD has
had a bullish seasonality in April. Whether this will repeat this year it
remains to be seen. In terms of monetary policy, it is more likely for the BOE
to have a hawkish message than the ECB, BOJ and even SNB. Inflation in the UK
is likely to rise further to 6.5% year over year.

 

Nothing new is
expected from Kuroda this week as it seems a weaker JPY is not seen as a
problem for now. I expect that USD/JPY will enter a consolidation phase in the
week ahead and the JPY to remain weak until something new comes that could
change the narrative. 

 

The SNB is not yet signalling
a dovish stance despite further CHF strength. In the future, „a push below
parity vs EUR, if seen, may trigger political pressure on the SNB to weaken CHF
via modest FX intervention,“ City analysts say.

 

This article was
written by Gina Constantin.

85 of 102 economists forecast a 50 bps rate hike in May56 of 102 economists forecast a follow-up 50 bps rate hike in JuneFed funds rate now expected at 2.00% – 2.25% at the end of the year (previously 1.50% – 1.75%)Fed funds rate then expected to be at 2.50% – 2.75% at the end of 2023That’s quite the aggressive view but I guess it reflects what we’re hearing from Fed policymakers recently. But again, how exactly will the economy take to all this when rate hikes aren’t exactly the solution to rampaging inflation? I still don’t see how the Fed can get away with an unimpeded path to hike towards 2% considering the economic backdrop.If they do get there, it’s going to be a short-lived one if anything else as rate cuts are surely going to return to the table soon when the economy stutters. Some analysts in the poll are already calling for that in Q4 2023.ING economist, James Knightley, says that:“Given the shift in official commentary with inflation pressures visible throughout the economy, we believe the Fed will deliver half-point interest rate increases at the May, June and July policy meetings. With the Fed seemingly feeling the need to ‚catch up‘ to regain control of inflation and inflation expectations, a rapid-fire pace of aggressive interest rate increases heightens the chances of a policy misstep that could be enough to topple the economy into a recession.“The Reuters poll also shows a median 1/4 chance of a recession in the US during the coming year, with the odds rising to 40% in the next 24 months.

There isn’t anything too significant on the board for today with light expiries seen around current levels.As such, trading sentiment will still be dictated by the flows as sentiment (from the bond market especially) is the key driver for the time being. For USD/JPY, just be wary that there is a lack of meaningful expiries at and above 125.00 so there isn’t much to hold the pair down in the event of a firmer breakout.Besides that, the Easter break will start to kick in on Friday so that explains the lack of interest on the board for the day itself.For more information on how to use this data, you may refer to this post here.