King dollar roars again

KBC Market Research Desk KBC Bank

Markets

The core bond relief couldn’t even last for a full day. The most eyepopping move occurred in UK markets, where the 2y yield at some point fell almost 40 bps but eventually closed 7.7 bps higher. The long end surged another 45 bps. Short term yields in the US were still down 4.1-6.1 bps but faced losses that were more than double earlier in the day. Europe’s swap curve steepened with gains of 2.4 bps (2y) to 14 bps (10y; now comfortably above 3%). This impressive intraday yield turnaround occurred organically, starting around noon but was reinforced by reports about allegedly sabotaged leaks to the Nord Stream pipelines (pushing gas prices up by 25% at some point) and warnings that Russia may cut supplies via Ukraine – the last link that still delivers some to western Europe. Fed’s Bullard stressing the pressing need for more decisive rate action in order to restore credibility added oil to the fire. Stocks gave up initial gains to finish 0.4% lower in Europe. In the US only the Nasdaq was able to close in the green (+0.25%). Dollar weakness also reversed during the day. The trade-weighted closed at 114.1. EUR/USD finished just south of 0.96. The yen continued to flirt with 145; the level that prompted FX interventions last week. Sterling recovered a tad of previous losses. EUR/GBP was down from 0.899 to 0.894. Cable rose to 1.073.

It’s business as usual in Asian dealings. King dollar roars again, helped by the White House downplaying prospects of an agreement à la Plaza 1985 to counter the strong greenback. That’s no surprise as this helps to dampen inflation. EUR/USD is testing the previous intraday YtD low/support at 0.955. DXY advances to 114.6. The yuan falls to the lowest level against the dollar since 2008 (7.22). “Business as usual” also includes higher core bond yields (US adds 2- 3 bps across the curve) and declining equities (South Korea underperforms with losses of more than 3%).

It’s again speech fest on the economic calendar today. Central bankers from both sides of the Atlantic participate in the inaugural Frankfurt Forum on US-European Geonomics today. The (role of the) euro and the dollar are among the discussion topics. We don’t think it will affect the current market dynamics though. The US10y already tested the symbolically important 4% hurdle this morning and we look out for a break higher. After securing the 3% barrier, the 10y European swap rate is headed for the 2011 high at 3.67%. EUR/USD is back at the lower bound of the downward trend channel and lost support of the 2001 interim high (0.9594). We cannot exclude a break lower given the unabating dollar strength. Equity futures point to a lower opening to the tune of 0.7%.

News headlines

The Irish government yesterday announced what it called two budgets in one. The government upwardly revised its forecast for 2022 modified domestic demand to 7.7%, but this is expected to slow sharply in 2023 (1.2%). For this year the government expects a budget surplus of €1 bln and the surplus is expected to rise further to €6.4 bln next year, due to higher revenues, including revenues from VAT, income tax and corporate tax. This surplus allowed the government to take measures to ease the cost of living crisis. A total of €11 bln spending is made available consisting of €4.1 bln one-off measures and €6.9bln permanent budget measures. The one-off measures include businesses receiving up to €10.000 p/m for energy bills while households will receive €600 electricity credits. The permanent measures include raising the threshold for the highest income tax rate from € 36 800 to 40.000, amongst others.

The IMF on Wednesday said that the new proposals of the UK government would likely increase inequality. An IMF spokesman in response to a query from Reuters was quoted: ‘Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.’ The Fund suggested that the government in its November budget should consider ways to provide support that is more targeted and reevaluate tax measures for higher income earners.

Download The Full Sunrise Market Commentary

Author

KBC Market Research Desk

KBC Bank

EUR/USD hits two-day highs near 1.1820

EUR/USD picks up pace and reaches two-day tops around 1.1820 at the end of the week. The pair’s move higher comes on the back of renewed weakness in the US Dollar amid growing talk that the Fed could deliver an interest rate cut as early as March. On the docket, the flash US Consumer Sentiment improves to 57.3 in February.

GBP/USD reclaims 1.3600 and above

GBP/USD reverses two straight days of losses, surpassing the key 1.3600 yardstick on Friday. Cable’s rebound comes as the Greenback slips away from two-week highs in response to some profit-taking mood and speculation of Fed rate cuts. In addition, hawkish comments from the BoE’s Pill are also collaborating with the quid’s improvement.

Gold climbs further, focus is back to 45,000

Gold regains upside traction and surpasses the $4,900 mark per troy ounce at the end of the week, shifting its attention to the critical $5,000 region. The move reflects a shift in risk sentiment, driving flows back towards traditional safe haven assets and supporting the yellow metal.

Crypto Today: Bitcoin, Ethereum, XRP rebound amid risk-off, $2.6 billion liquidation wave

Bitcoin edges up above $65,000 at the time of writing on Friday, as dust from the recent macro-triggered sell-off settles. The leading altcoin, Ethereum, hovers above $1,900, but resistance at $2,000 caps the upside. Meanwhile, Ripple has recorded the largest intraday jump among the three assets, up over 10% to $1.35.

Three scenarios for Japanese Yen ahead of snap election

The latest polls point to a dominant win for the ruling bloc at the upcoming Japanese snap election. The larger Sanae Takaichi’s mandate, the more investors fear faster implementation of tax cuts and spending plans.

XRP rally extends as modest ETF inflows support recovery

Ripple is accelerating its recovery, trading above $1.36 at the time of writing on Friday, as investors adjust their positions following a turbulent week in the broader crypto market. The remittance token is up over 21% from its intraday low of $1.12.