Markets were shaken yesterday by Russia’s surprise request to countries it considers as “unfriendly” (the EU, the US and the UK are included) to pay for energy exports in roubles. That sent gas prices sharply higher after an extended downtrend and weighed on global risk sentiment. Multiple reports suggest that EU countries are nearing a deal to reduce their dependence on Russian energy exports. Observe the foreign exchange rates.
The dollar stood in the middle, rising against the low yielders and falling against commodity FX. We have a few more Fed speakers today as markets fully price in a 50bp move (followed by a 25bp hike) in either May or June, and we see a non-negligible risk that investors will start buying into the view of two back-to-back 50bp hikes in the next two meetings. The US data calendar includes durable goods orders and some activity surveys today, but the focus will likely remain on developments in the Russia-NATO countries' discussions over energy export payments.
On the session, the CAD hasn't changed much. Domestic factors for the CAD are few and far between (there are no noteworthy data reports until next Thursday's January GDP report), but the combination of firm energy prices and reduced market volatility is favourable for the CAD in the medium term. However, we remain optimistic about the CAD outlook; commodity prices are expected to continue high, the domestic economy is off to a strong start in the new year, and the BoC should keep up with the Fed's pace of tightening in the coming months to counteract domestic inflationary pressure. We continue to believe that USD gains are limited at the time, and that the CAD will improve in the next months. Observe the USD/CAD trends.
Most think downside risks should prevail today for EUR/USD, given the resurgence of Russia-related risk premium on energy prices and the longer-term policy divergence/growth story. Data-wise, we’ll see the eurozone’s PMIs, which may have weakened on the back of geopolitical events and high energy costs. While the FX impact should not be sizeable, it will likely endorse the market’s recent repricing of the eurozone’s growth expectations. In terms of central bank speakers, we’ll hear from Executive Board member Isabel Schnabel, one of the most hawkish voices of the ECB. Expect a move to 1.0900 in EUR/USD by the end of the week, with any decision among EU countries to reduce exposure to Russian commodities that could weigh on the common currency.
The GBP weakened more than its peers yesterday despite an above consensus UK CPI read as markets likely perceived the measures included by Chancellor Sunak in the “mini-Budget” will fall short of providing enough support to consumers amid sharply rising living costs. On the data side, PMIs will be in focus also in the UK today, and like in the rest of Europe, we should see indications that the war in Ukraine and high energy prices have worsened the economic outlook in the country. BoE’s Catherine Mann is the only noteworthy central bank speaker in the calendar today.
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