Daily Market Outlook, March 14, 2022

Overnight Headlines

The Federal Reserve, Bank of England and Bank of Japan hold policy meetings this week, as the Russia-Ukraine conflict continues to hang over markets. Volatility is likely to persist until there is greater geopolitical clarity.

All three central banks face the challenge of sharply rising inflation and growing downside economic risks, worsened by the blowback from the West's expanding sanctions against Russia.

The Fed is widely expected to lift the target band by 25 basis points to 0.25%-0.50%, the first rise since 2018. The Fed's rate and economic projections will be in focus. Markets are pricing in a quarter-point hike at all but one of the remaining six meetings after Wednesday's decision – with some chance of a half-point hike at one. Fed Chair Jerome Powell will need to address the risks from the Russia-Ukraine crisis, including surging oil prices and significant falls in equity markets.

The BoE is expected to hike rates 25 basis points to 0.75% on Thursday, its third straight increase. The central bank has the difficult task of tackling rising inflation without choking economic growth.

The BOJ is expected to remain on hold, as inflation is far less of a concern in Japan than in other major economies.

Russia's central bank is also scheduled to meet this week and the government is due to pay a coupon on its sovereign debt

IMM positioning and sentiment data for the week through Tuesday reflect a stabilization in the recent leakage in overall USD long positioning after successive weekly declines over the past two months. The aggregate dollar long position did fall again this week but the drop was a more or less meaningless USD7mn decline.

While this week’s data show little change in overall exposure to the USD, there were some significant, offsetting moves in the currencies which tend to reflect the highly uncertain geo-political risk backdrop that has developed since Russia’s invasion of Ukraine. Net EUR longs were cut by a little over USD1bn while markets added nearly as much to net GBP shorts,driving demand for the USD. At the same time, havens were in better demand, with net short covering in both the CHF and JPY driving USD sales and offsetting the roughly USD2bn combined move out of the EUR and GBP.

Investors were (mostly) cautious on the higher beta currencies; CAD net longs were cut more or less in half in the past week as gross long positions were cut and gross shorts increased. AUD positioning was more or less unchanged while net NZD shorts were cut by USD115mn. But investors continued to show some appreciation for the MXN adding a little over USD200mn in net longs to take the total to USD1.24bn, modest but still the biggest bull bet on the peso in two years. The spot rate has not, however, reflected this interest. Rising inflationary pressures, which the conflict in Ukraine risks exacerbating, are driving strong interest in gold; net gold longs jumped USD6.2bn to USD56.3bn, the biggest bull bet on gold since early 2021

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

EUR/USD: 1.0900 (1.84BLN), 1.0925 (261M), 1.1000 (1.66BLN) 1.1050-60 (1.25BLN), 1.1145-55 (660M), 1.1165-70 (449M) 1.1190-00 (787M)
USD/JPY: 115.00-10 (490M), 115.50-60 (605M)
115.75-85 (640M), 116.00 (780M)
EUR/JPY: 126.50 (677M), 128.30 (331M), 129.00-10 (478M)
GBP/USD: 1.3200 (388M). EUR/GBP 0.8370 (355M)
USD/CHF: 0.9350 (280M). EUR/CHF: 1.0400 (546M)
USD/CAD: 1.2660 (414M), 1.2735-40 (300M, 1.2795-05 (320M)
AUD/USD: 0.7100-10 (820M), 0.7125-30 (310M), 0.7200 (738M

EURUSD Bias: Bearish below 1.15 Bullish above

GBPUSD Bias: Bearish below 1.36 Bullish above.

USDJPY Bias: Bullish above 114.50 Bearish below

AUDUSD Bias: Bullish above .7100 Bearish below

AUD/USD opened 0.7295 after falling 0.88% Friday when USD strengthened
It traded 0.7303 early on optimism regarding Ukraine-Russia talks
The impact reversed when that optimism led to a swift fall in crude
Other commodities followed suit and AUD/USD tracked lower
Brent crude futures fell over 3% while copper eased 1% and Dalian iron ore fell 3%
AUD/USD traded at 0.7251 and is around 0.7255 into the afternoon
AUD/USD eyeing support at 21-day MA at 0.7249 and break ends trend higher
Resistance is at 0.7310/15 where the 10 & 200-day MAs converge