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China Bends, Russia Doubles Down, and the Euro Approaches $1.10

, April 4, 2022, 0 Comments

china-trade-exportsRussia’s brutality as it re-positioned forces in Ukraine and China’s move to ease the clash with US auditors dominate the news. Hong Kong tech stocks rallied on the news while mainland markets are closed today and tomorrow for a national holiday. The MSCI Asia Pacific Index has traded higher for the past three weeks.

European stocks are firm to start the week. The Stoxx 600 has rallied in three of the past four weeks. US futures have edged higher in the European morning. The 10-year Treasury yield is slightly higher at 2.39%. The two-year is off a little at 2.43%. Europe’s 10-year benchmarks are mostly 1-4 bp softer. The US dollar is mixed. Among the major currencies, the dollar bloc is doing best while the euro and Swedish krona are trading with a heavier bias. Among emerging market currencies, the Philippine peso is faring best. Foreign investors were buyers of local equities and tomorrow’s CPI may prompt the central bank to hike rates as early as next month’s meeting. The South African rand, Indian rupee, and Mexican peso lead the complex. The re-election of Orban in Hungary means that confrontation with the EU will likely intensify and the forint is the weakest among the emerging markets currencies today with around a 0.5% loss. Gold initially slipped to a four-day low near $1915 before recovering back above $1930. May WTI is in a $98-$101 range and natgas in the US and Europe is softer. Iron ore rose 1.4% today after rising 4.6% last week. Copper enjoys a firmer tone today after slipping for the past two weeks. May wheat has begun the new week with an almost 1% advance. It fell by about 4.2% over the past two sessions and declined by 10.7% last week.


Beijing took an important step toward meeting the US requirement that foreign-based companies must share key financial data, including audits with the Securities and Exchange Commission. China has been balking but over the weekend, regulators proposed a draft of revisions that remove a key hurdle from companies complying. There are more than 200 Chinese companies that trade in the US on American Depositary Receipts. Without complying for three-consecutive years, Chinese companies would face de-listing starting in 2024. The draft is subject to feedback until April 17 and would still need additional approvals. It may be that some Chinese-based companies may chose to re-list elsewhere, but the weekend developments show that in the face of resolute regulators who are not singling out China, Beijing will conform.

China’s relations with Europe have deteriorated over the past year. The pre-weekend summit seemed to express mutual re-criminations. The EU warned Beijing not to help Russia. Beijing warned the EU from tying its future to the US. Russia’s invasion of Ukraine has brought Europe and the US closer. Some Russian gas will be replaced by US suppliers. NATO has been strengthen and will likely have a semi-permanent increase in troop-levels. Some of Europe’s new military spending will also go to US contractors. Inventories drawn down in transfers to Ukraine will be replenished and modernized. After many years of negotiations, the EU-China investment agreement seemed a done deal in late 2020, but in now lies in ruins. It was shattered by Beijing’s counter-sanctions against the EU, including members of the European Parliament who were to approve the deal. The EU had sanctioned China over human-rights abuses in Xinjiang.

There is a wide gap between what the market anticipates and what the Reserve Bank of Australia has signaled. The cash rate futures suggest the market leans toward a June hike (78%) and around 40 bp of tightening is priced in for July. The RBA has acknowledged a rate hike is possible before the end of the year. The market has almost 170 bp of hikes discounted for the remainder of the year. The RBA meets first thing tomorrow in Sydney. The Australian dollar may be vulnerable if the central bank does not lay the groundwork to begin closing the gap.

The 10-year JGB is trading quietly after the last week’s robust BOJ defense of the 0.25% Yield-Curve Control cap. It softened slightly to slightly below 0.21% today. The dollar has been confined to a relatively narrow range against the yen today (~JPY122.25-JPY122.85). In the European morning, it is straddling the JPY122.50 level where a $600 mln option expires later today. We suspect the market is fishing for a new range for the exchange rate. The Australian dollar is firm within the roughly two-week range of about half-of-a-cent on either side of $0.7500. There are A$1 bln of options that expire there tomorrow. The broad sideways movement has not alleviated the over-bought momentum indicators. With the Chinese mainland markets closed, the offshore yuan is in a narrow range with a slightly softer bias. Net-net it is little changed on the day.


The massacre in Bucha and other war crimes in Ukraine are spurring Europe to consider new sanctions against Russia. Germany’s Defense Minister suggested what has until now been unthinkable: ban Russian gas. Lithuania has become the first EU country to do so, but it was made possible by a multiyear energy policy and infrastructure planning. Separately, note that the G7 have agreed to also limit Russia’s ability to sell its gold, which is thought to be covered by existing sanctions against the central bank.

Gazprom provided some details at the end of last week for how payment in roubles would work. Two accounts would be set up at Gazprombank, one in euros and one in roubles. It appears that the buyers can still pay for Russian gas in euros, but within Gazprombank, they would be exchange for roubles. The main impact seems political. Germany and Austria took steps last week that begin the process that could lead to rationing. The rouble’s exchange rate appears to have appreciated, but as US Secretary of State Blinken observed over the weekend, the rebound is a function of capital controls and a manipulated market. That said, Russia is experiencing a positive terms-of-trade shock. Its exports are more valuable and its imports are drying up in the sanction regime that is having a broader cooling off effect.

After a weak January, German trade jumped in February. The monthly surplus rose to 11.4 bln euro, around 10% greater than economists (Bloomberg median) projected. Exports jumped 6.4% in the month after falling 3% in January. Imports rose 4.5% after falling 4.0% previously. Germany’s monthly trade surplus averaged 14.4 bln euros last year and 15.0 bln euro in 2020. For the two years before Covid, the monthly surplus averaged around 19 bln euros.

Turkey’s inflation jumped almost 5.5% last month to lift the year-over-year rate to 61.1% from 54.4% in February. It is a new 20-year high. Transportation prices are up over 99% in the past 12 months, and foods prices are up 70.3%. The government has cut taxes on basic goods and has reduced electricity levies. The lira depreciated by 44% last year and is off 9.6% so far this year.

The euro is trading at a four-day low near $1.1020 in the European morning. A week ago was the last time it traded below $1.10. There are options for about 675 mln euros at $1.10 that expire today. On the upside, the $1.1040-$1.1060 area may provide the nearby cap. The euro has been a bit streaky lately. Today is the third session in which it is falling and it follows a three day advance which followed a three-day decline. Before this streak it had settled near $1.1030. Sterling is trading within the pre-weekend range (~$1.3085-$1.3150). For the third session, it remains within the range set last Wednesday (~$1.3085-$1.3185). The UK economic calendar is light this week and sterling may be driven by the dollar’s broad direction. Lastly, we note that the euro appears to be carving out a base against the Hungarian forint near HUF366. A close above HUF370 would help lift the technical tone.


The US highlight of the week will be the FOMC minutes on Wednesday. They pose some headline risk but are too long for many market participant to review in any depth. This week too the headlines are key but the subject matter will be a bit different than usual. At stake is the Fed’s thinking about when and how fast the balance sheet will begin shrinking. The central bank will not have to sell a single security. Instead the balance sheet reduction will take place in a more passive mode by simply limiting the re-investment of maturing proceeds. Last time, the Fed capped the reduction at $50 bln a month. This time, the signals are for a more aggressive approach and many expect a $80-100 bln monthly cap. Today, the US reports February factory orders and the final look at durable goods orders. This is not typically a market mover.

This is a big week for Canada. It will lay the backdrop for Bank of Canada meeting on April 13, where the market leans toward a 50 bp rate hike (~66%). The passive balance sheet reduction could also begin shortly. March employment data is at the end of the week. The February report was incredibly strong and the momentum likely carried into last month, even if not to the same extent. The Bank of Canada sees a strong economy, with greater than expected price pressures, and a very accommodative monetary policy setting. A day before the jobs data, the government will unveil the budget. Prime Minister Trudeau is expected to make good on some of his campaign promises. The budget will also implement the agreement worked out with the NDP. The new fiscal measures may also embolden the Bank of Canada next week which already sees capacity constraints approaching.

The week’s highlight for Mexico is the Thursday release of March CPI figures. A small acceleration is expected, with the headline rising to 7.35% (median projection in Bloomberg’s survey ), up from 7.28% in February. The core rate is also expected to tick up (6.71% vs. 6.59%). Banxico does not meet until next month (May 12). The swaps market has 70 bp of hikes discounted over the next three months and 175 bp over the next six months. The peso appreciated about 3% last month and was around 0.40% in the January-February. The Brazilian real is still the regional (and global) favorite. It rose by about 8.65% in March to bring the year-to-date gain almost 19.7%. High interest rates, ideas that its aggressive tightening cycle is nearly over, and the commodity exposure of its equity market are drawing foreign investment, and keeping more domestic funds at home.

The Canadian dollar enjoys a firmer bias today but is within the pre-weekend range. The US dollar traded roughly between CAD1.2480 and CAD1.2540 at the end of last week. The CAD1.2510-CAD1.2520 may provide a sufficient cap in North America today. The greenback is also trading quietly against the Mexican peso, and has not left the MXN19.81-MXN19.89 range. From the March 8 high near MXN21.47 to the pre-weekend low around MXN19.75, the dollar fell a little more than 8% against the peso. If the pre-weekend high near MXN19.93 holds, it would be the fifth session of lower highs and lower lows. This has stretched momentum indicators, and suggest at the least an extended consolidation phase, if not a proper correction.