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Sunset Market Commentary – Action Forex

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A lot of eyes were on UK Finance Minister Sunak and his spring statement on the budget and the economy. The UK cost of living crisis worsened with inflation having accelerated to a faster-than-expected 6.2% y/y (5.2% core) in February, data showed ahead of Sunak’s update. He wants to alleviate some of the income squeeze by announcing the biggest ever fuel-duty cut until March next year in a tax cut worth £5bn. Sunak also removes the 5% VAT on the installation of some energy saving investments, doubles household support and, as widely expected, raises the threshold at which people pay National Insurance by £3000 instead of the previously planned 300 pounds. The latter is in effect a (£6bn personal) tax cut for low earners and is due to kick in next month. Sunak also announces a cut in the basic income tax to 19% by election year 2024 and promised to cut taxes for business investment in the fall. The measures widen the deficit forecast for FY 22/23. For the coming five years however, the Office for Budget Responsibility has cut the deficit forecast by £29bn. Combined with the OBR expecting “only” £125bn of bond sales in 2022/2023 compared to market estimates of £152bn and slashed growth estimates (3.8% vs 6% in 2022), UK yields in a kneejerk move declined 9.8 bps (10y) to 13.3 bps (2y). Losses are being limited to around 5 bps in the meantime. Market’s monetary policy expectations were unaltered after Sunak’s update, sticking to five more hikes by the end of the year. EUR/GBP hit the 0.83 big figure in early trading but prevented a break lower. The pair is filling bids around 0.832. Cable turns below 1.32 again.

Outside the UK, core bond markets licked their wounds after their relentless decline in recent weeks. US Treasuries outperform with changes ranging from -1.9 bps (30y) to -4.4 bps (5y), driven by real yields. Inflation expectations remain on the rise, supported by commodity prices soaring (again). Brent oil trades above $120/b, up more than 20% in just 5 days. Dutch gas futures bounce off €100/MWh support to €117. German/European yields ease 1-3 bps in a flattening move. EU budget commissioner Hahn poured cold water over expectations for more EU common debt issuance to help finance the green transition and organize a European defense. EUR/USD was already struggling amid slight risk-off (European stocks lose more than 1%) and eventually fell below 1.10 after Hahn’s comments. USD/JPY’s ascent stalls in the high 120 area while EUR/JPY shifted in reverse (from 133.23 to 132.7). News Headlines

Czech National Bank deputy governor Mora believes that circumstances will force the CNB to go well above 5% with rates. Those circumstances obviously are Russia’s invasion which lifts energy prices and thus inflation. Though the risk of stagflation is real, Mora believes that the Czech economy can stomach higher rates. The economic slowdown may not be that bad, mainly because the Czech labour market is very tight. People still have huge savings from during the pandemic and will keep on spending. Deputy governor Mora is more reluctant to use FX reserves and a stronger currency in helping to achieve inflation stability. CNB governor Rusnok floated that idea over the weekend. Governor Hulob yesterday said that he preferred rate hikes over FX sales. The CNB meets next on March 31. The policy rate currently stands at 4.5% with Czech money markets pricing a policy rate peak around 5.75%. EUR/CZK today touched 24.50 before rebounding back to 24.60.

Russian president Putin told his government that he took the decision to switching to ruble payments for natural gas supplies of the so-called hostile states (US, UK and EU member states) and stop using the compromised currencies in such transactions. He ordered the central bank to develop a mechanism to make ruble payments within a week. Simultaneously, he stressed that Russia will definitely continue to supply natural gas in line with the volumes and prices, pricing mechanisms set forth in existing contracts. The Russian ruble rises on Putin’s creative accounting measure to try to circumvent some of the international sanctions. USD/RUB drops back below the 100 level.

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