Market Briefing - Ebbing Geopolitical Risks Lift Majors Against the Dollar

The euro is climbing and most major currencies are outperforming the dollar as natural gas flows to Europe resume and geopolitical risks subside - albeit to a rolling boil. Futures are set up for a slightly weaker open and the ten-year Treasury yield is back above 3 percent as traders fade the dead-cat bounce that lifted valuations through the early part of the week.

Gas began moving through the Nord Stream 1 pipeline this morning, alleviating uncertainty for businesses and consumers who had feared that Russian President Vladimir Putin wouldn’t reopen the taps after annual maintenance. Volumes are gradually ramping up, but there is little question that flows will remain vulnerable into the winter months as Russia uses the fuel as a geopolitical bargaining chip, forcing Europe to ration consumption and seek alternative suppliers.

Commodities are taking a pummelling, with oil prices leading the way as gasoline demand slumps and refined product inventories build. Global food prices are also weakening on the possibility of a deal between Russia, Ukraine and Turkey over the shipment of wheat out of the region.

The Canadian dollar’s relationship with commodity prices is back, with the exchange rate slipping after yesterday’s June inflation report freed traders to focus on global fundamentals. The loonie has fallen roughly 1.5 percent over the last five days, following crude and raw materials indices down.

Japan’s central bank kept its long-term yield target and asset purchase programme unchanged while raising the inflation outlook. Policymakers now expect core prices to rise 2.3 percent in the year to March 2023, up from 1.9 percent previously. Growth projections were revised lower, from 2.9 percent to 2.4 percent, as high inflation and weakening export volumes take a toll.

In the press conference following the decision, Governor Kuroda was unrepentant: “We have no intention at all of raising rates under the yield curve control framework. We also have zero intention of expanding the 0.25 percent range on either side of the yield target. Right now, we need to continue to tenaciously pursue monetary easing”. He noted that a dramatic shift in policy would be required to lift the exchange rate, saying, “If you were serious about stopping the weaker yen just with rate increases, you would need significant hikes and they would be very damaging to the economy”. The yen slipped slightly but remains above last week’s lows.

Italy’s coalition government neared collapse after three major parties - Five Star, Forza Italia, and the League - withdrew their support, refusing to back Mario Draghi in a confidence vote. The prime minister offered his resignation in response, raising the likelihood of an autumn election. Italian bond yields climbed, but investors were broadly unsurprised - the country has had 69 governments since 1945.

The European Central Bank will almost certainly raise rates in a few minutes. Madame Lagarde is expected to confirm a 25-to-50 basis-point hike - the first in a decade - and deliver details on a new instrument designed to protect peripheral countries from higher borrowing costs. Fiscal hawks want to know how the tool will circumvent a ban on financing governments, and investors are looking for a plan that includes unlimited resources and less-onerous borrowing conditions relative to the previous iteration - which was never used.

US jobless claims are expected to drop to 240,000 from 244,000 in the prior week. Markets are watching warily for signs of a softening in labour markets, but none have yet appeared.

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