The headline reading is the lowest since May last year with ZEW noting that the current economic situation reflects pessimism and experts assume that conditions will continue to deteriorate. But there was a decline in inflation expectations, giving some cause for ohpe. That said, the prospect of stagflation remains over the next six months.
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.
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.
Markets:
Gold up $12 to $1944
US 10-year yields up 5 bps to 2.70%
WTI crude up $1.78 to $97.80
S&P 500 down 12 points to 4488
CAD leads, NZD lags
The US dollar surged in early New York trade then gave it all back.The rally in the dollar had some backing as Treasury yields continued to march higher. Yields in the belly of the curve made new cycle highs with 7s hitting 2.81%. Three year yields also inverted over 30s and that continues to raise concerns.A broad dollar rally came with that and it ran stops as cable fell through 1.3000 to the lowest since November 20202. USD/JPY though couldn’t get through the March highs despite a sixth day of gains. That, combined with a softening of yields sparked a reversal as large as the initial move.All the dollar gains against the pound, euro and commodity currencies unwound and most of the gains against the yen did as well.The reversal in tone was helped by a turn higher in stocks midway through the day. That tone though didn’t last into the close as US equities stumbled in the final minutes of trading.The week ahead features US CPI and retail sales and that will help to keep things lively. Have a great weekend.