Daily Market Outlook, April 4, 2022

Overnight Headlines

Geopolitical tensions continue to simmer while markets are likely to focus on assessing central banks' position toward stagflation risks as the Federal Reserve and European Central Bank release minutes this week, while Australia's central bank delivers a policy decision.

Day-to-day updates in the Russia-Ukraine crisis are impacting markets less, but major developments will still matter. Reports over the weekend hinted at direct talks between the countries' leaders, but were tamped down by Russia. There should be a relief rally for the EUR, support for equities and lower energy prices if that pans out.

The Reserve Bank of Australia will likely remain on hold Tuesday, but the market is looking for any hints the bank might finally commence its tightening cycle. A 15-basis point hike has been priced in for June and for the cash rate to be 2.0% higher by end-2022. Some Reuters poll respondents expect tightening to begin in June, but most foresee an August start.

The Fed will release minutes from their March meeting at which they hiked rates for the first time in over three years. Anticipate confirmation of the hawkish turn in expectations and more detail on plans to shrink the balance sheet.

BoJ To Keep Rates Low As Strong, Not Weak, Yen Still Kuroda's Enemy No. 1. Sources familiar with the bank's thinking and people close to Kuroda, whose decade in charge ends next April, said he is likely to protect his legacy by avoiding tweaks to a monetary policy that continues to treat a strong yen as enemy No. 1. The BOJ's dovish signals may give markets a chance to drive down the yen further, as prospects of steady policy tightening by the Federal Reserve widen the Japan-U.S. interest rate gap. "The BOJ looks at inflation, not yen moves, in guiding policy," one of the sources said

Bullish positioning in the USD improved for a third consecutive week to its highest aggregate long since early-January thanks to an USD2.8bn increase to USD16.4bn, according to analysis provided by Scotia Bank. The rapid improvement in speculative sentiment in the USD since dropping to a seven-month low of USD5bn in early-March coincided with solid gains in the dollar against the JPY, GBP, and EUR over the month

The JPY’s losses to the 125 yen per USD mark last week were met with a sharp deterioration in the already large JPY bearish position; the yen was the worst performing major currency over the period with a 1.7% decline. Accounts took the JPY’s net short to USD10.4bn, a four-month-high, with a USD2.3bn move against it as longs were heavily cut (from 37k to 15k contracts) while outstanding shorts held relatively steady. The CHF’s position also worsened with a USD425mn move against the franc to take its aggregate short to USD1.5bn. The haven currencies experienced the largest positioning moves (be it bearish or bullish) of those covered in this report.

Investors warmed up somewhat to the MXN as it led all the currencies tracked here over the period with a 1.5% gain. The small MXN short was reduced to USD206mn with investors placing a net USD239mn bet in favour of the peso in a week where the exchange rate breached the key psychological level of 20 pesos per USD. The MXN traded this morning at its strongest level in seven months.

Accounts reversed a small part of last week’s large net bet against the CAD of USD1.8bn, trimming the small short to practically neutral at USD123mn on the back of a USD270mn adjustment in the CAD’s favour; while small, this was the biggest net bullish bet this week. Its commodity peers, the AUD and NZD, saw mixed results, with the net AUD short slightly falling by USD99mn to USD3.7bn (still the second largest short after the JPY’s) and the NZD’s small long was trimmed by USD236mn to a small net short of USD60mn.

Sentiment in the EUR and GBP weakened over the week as speculators wagered against both currencies, in net terms, with the net EUR long clipped by USD325mn and the sizable net GBP short rising by USD192mn. Negative positioning in the GBP—which beat only the JPY this week with its 1.3% depreciation—is now at a 13-week-high of USD3.3bn after the pound’s failed test of the 1.33 zone last week. The decline in the net EUR long this week to USD3.0bn follows the currency’s failure to hold a 1.11 handle around mid-month and erases around half of last week’s move of USD713mn in its favour.