Daily Market Outlook, March 30, 2022

Overnight Headlines

Reports that Russia is de-escalating military operations around Kyiv have further buoyed market risk sentiment, although the Kremlin said it does not amount to a ceasefire and it was met with some scepticism in the US. Equities in the Asia-Pacific region are mostly trading higher, with the notable exception of Japan where the yen recouped recent losses.

Rising U.S. yields are also dragging Japanese government bond yields in their wake, a threat to Japan's ultra loose monetary policy. The Bank of Japan increased its efforts to defend its key yield cap on Wednesday offering to ramp up buying of government bonds across the curve including through unscheduled emergency market operations. While this apparently underscored its resolve to hold to the policy, the question now becomes whether the strategy is sustainable? The widening differential between U.S. and Japanese yields have caused the yen to weaken sharply, but it managed to regain some lost ground on Wednesday.

Eurozone inflation, as elsewhere, has risen significantly in recent months, even before the war in Ukraine which has highlighted Europe’s dependency on Russian gas and other energy imports. The conflict has the potential to drive Eurozone annual headline inflation rates sharply higher from the already elevated 5.8% in February. The March ‘flash’ CPI estimate is due on Friday, but key national inflation data will be released ahead of that including Spanish and German figures today, followed by France and Italy tomorrow. In particular, the national prints will be watched closely for signs that the Eurozone flash CPI in March will jump up by more than the consensus forecast of 6.7% (central forecast is 7.3%).

ECB Chief Economist Lane this week sought to play down the massive spike in inflation, emphasising that it is an imported price shock (given Europe is a net energy importer) rather than a reflection of domestic inflationary pressures, and that inflation will be ‘a lot lower’ next year. Still, current uncomfortably high levels of inflation will likely result in significant pressure from more hawkish ECB members for interest rates to rise before the end of the year. There are a few ECB speakers today, including a speech from President Lagarde who is visiting Cyprus. Eurozone economic confidence indicators due this morning are forecast to fall.

In the UK, BoE Deputy Governor Broadbent is scheduled to speak this morning on “the MPC at 25”. Broadbent has always voted with the majority on the MPC, so his views on the policy outlook will be closely listened to. The BoE has sounded more cautious about prospects for further policy tightening given increasing economic uncertainties and headwinds. Governor Bailey noted this week that there were signs that demand is slowing. The Lloyds Business Barometer for March will be released early tomorrow and will provide an update on business confidence which has so far held up much better than consumer confidence. The second estimate of Q4 GDP is also due tomorrow morning and will provide additional detail on the extent to which consumers may be drawing down savings to cushion themselves from the impact of higher prices.

There are also some US Fed speakers in the schedule, including a virtual speech from Kansas City Fed President George (voter) to the Economic Club of New York. The third estimate of US Q4 GDP is due, as are China PMIs early Thursday morning which may show impact from strict lockdown measures to combat rising Covid case numbers.

(Hedging effect can often draw spot toward strikes pre expiry if nearby (P) Puts (C) Calls )

EUR/USD: 1.1000 (2.44BLN), 1.1050-60 (1.8BLN) 1.1100 (2.17BLN), 1.1150-55 (1.36BLN), 1.1195-00 (1.64BLN)
USD/JPY: 122.00-05 (690M), 122.50 (250M), 122.90-00 (1.0BLN)
GBP/USD: 1.3100-05 (630M).
USD/CAD: 1.2450 (550M) 1.2475 (350M), 1.2500 (718M), 1.2525 (730M), 1.2550 (317M)
AUD/USD: 0.7600 (360M). USD/CHF: 0.9240 (360M) 0.9250-55 (280M), 0.9350 (200M)
EUR/CHF 1.0340-50 (952M)