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Three Questions: Week of April 04

CalendarApril 4, 2022

Good morning, and welcome to Three Questions - a look at the big uncertainties facing currency markets in the week ahead.

Here are some of the things we're watching:

1. What will the Reserve Bank of Australia do tomorrow?

Australia’s central bank is universally expected to leave its benchmark rate unchanged at 0.10 percent when it meets tomorrow. Attention will instead be focused on the policy path for 2022, where the bank could hint that market-implied monetary tightening projections are too aggressive.

We think a commitment to remaining “patient” could be dropped from the statement, ratifying expectations for a move in June once May elections are out of the way.

At the same time, the bank could also push back against market pricing on front-end rates. Investors currently see a 25-basis point rise coming on June 7, followed by six more hikes of similar magnitude before year-end.

But tightening at such a pace might not be necessary.

The bank’s medium-term inflation target is a 2 to 3 percent band, giving it more leeway than its peers. And by making the Australian dollar the best-performing major currency this year, soaring commodity prices have delivered a natural inflationary offset - a factor that, if it were to reverse, might moderate any hawkishness.


2. How might the Fed minutes impact the dollar?

When minutes taken during the Federal Reserve’s last meeting are released on Wednesday, markets will gain critical insight into how the central bank plans to unwind its unprecedentedly-large quantitative easing programme. After the March decision, chair Jerome Powell said, “we expect to begin reducing the size of our balance sheet at a coming meeting”, telling reporters the “framework is going to look very familiar to people who are familiar with the last time we did this. But it'll be faster than the last time”.

Officials are broadly expected to outline a plan that would allow securities holdings to passively run off at a pace of roughly $80-$100 billion a month over time, consistent with the “gradual reduction” mooted in previous discussions. Faster or more active permutations could lift the front end of the yield curve and depress the long end, pushing rates deeper into inverted territory.

Traders will also zero in on what committee members say about the expected economic impact. If the proposed reduction is considered equivalent to a single rate hike in 2022, market-implied projections should be left intact - at the moment, investors expect the Fed to front-load its cycle by announcing half-point moves in May, June (and potentially July) before decelerating to quarter-point rate rises for the four remaining meetings after that.

If, in contrast, policymakers think balance sheet changes might impact financial conditions more profoundly, the front end of the curve could shift downward, while the long end rises - reflecting a tightening strategy that sees active balance sheet reduction as a partial substitute for increases in short-term rates, and a more sustainable growth path for the US economy.

But a more subdued reaction to the minutes could herald a turning point for the greenback. After a brutal first quarter, in which policy expectations underwent a violent repricing, the bar for further gains has been raised. Safe haven demand is falling as the war in Ukraine turns into a pitched battle. Currencies like the Australian and Canadian dollars are beginning to catch up with massive commodity price gains. And a stabilization in interest rate differentials could lend support to both the yen and the euro.

Dollar bulls are facing a tougher slog ahead.


3. How will this weekend’s French elections affect the euro?

This Sunday will see a first round of elections to determine whether President Emmanuel Macron gets another five years in office. A second round featuring the top two candidates will be held on April 24. Thus far, markets appear unworried - bond yields are stable and implied currency volatility levels around the polling dates remain low - but nuances in the results could change that.

Current polling estimates have the president winning roughly 28 percent of the vote in the first round with Marine le Pen in second at 21 percent. This is a wider gap than in 2017, when the independent centrist won 24 percent against the right-wing nationalist’s 21 percent. However, while Macron ultimately won that election by an almost two to one margin, he is now only about 7 or 8 points ahead in a hypothetical two-way vote.

The narrowing gap partly reflects a moderation in le Pen’s views - she has tacked slightly toward the centre, backing away from an earlier pledge to take France out of the common currency zone. But her insistence on sovereignty could threaten the Franco-German relationship, EU governance institutions, and efforts towards common fiscal and security policies.

Worrying signs from the first round would include Macron underperforming or le Pen surpassing expectations; voter apathy; a strong showing by other hard-right candidates; or a reluctance among losing candidates to endorse the President. These could hit the euro hard.

Conversely, a stronger performance from Macron would show he has been able to unite the centre and left in opposition to le Pen, gaining the support needed to pursue further economic and labour market reforms. This could lead to a repeat of 2017, when rising optimism around France’s contribution to pan-European growth and resilience helped support the euro - even as the US tightened policy.




AUD Reserve Bank of Australia Rate Decision

USD Trade Balance, February


USD Department of Energy Weekly Inventories

USD Federal Reserve Meeting Minutes, March 16


EUR European Central Bank Meeting Minutes, March

GBP Bank of England Speech, Pill

USD Weekly Jobless Claims

USD Federal Reserve Interview, Bullard

MXN Central Bank of Mexico Meeting Minutes, March


INR Reserve Bank of India, Rate Decision

CAD Employment, March

USD Baker Hughes Weekly Rig Count


“Furious investors and traders. Evaporating liquidity. A market that many veterans simply describe as “broken.” It’s been three weeks since nickel was suspended on the London Metal Exchange after a 250% price spike and while trading has resumed, the market remains all but paralyzed.”

Bloomberg: From VW to JPMorgan, the Unlikely Cast Behind Nickel’s Big Squeeze

“Short sellers are betting that the $82 billion portfolio that underpins tether’s value, now the size of a big money-market fund, is at risk of losses that the parent company hasn’t disclosed…”

Wall Street Journal: Short Sellers Bet Tether, Crypto’s Central Bank, Is Vulnerable to a Run

“It remains unclear whether the campaign will achieve its goal of deterring President Vladimir Putin or altering his calculus on the battlefield. So far, Russia’s military progress has been slower than many anticipated and Ukraine’s resistance stronger, but Mr. Putin has shown little interest in de-escalating the crisis.”

Wall Street Journal: How the U.S. and EU Cut Russia Off From the Global Economy

“But, as the current crisis illustrates, a diversification out of dollars into euros has turned out, as far as Russia is concerned, to be a difference that does not make a difference. Russia finds itself in what amounts to a euro-dollar trap - a triangle consisting of dollars, offshore euro-dollars and euros. It is this triangle of currencies that dominates the North Atlantic and East Asian financial hubs. It is subtended by dollar swap lines in unlimited amounts and is buttressed by a similar expansive monetary relationship with Japan.”

Adam Tooze: The New Buttresses of the Dollar System

“Just as in the 1970s, excessively inflationary policies were followed by bad luck, and just as in the 1970s, the authors of the expansionary policies chose to interpret all the problems as being a consequence of the bad luck, even though some of it was a consequence of their policies.”

New York Times: Ezra Klein Interviews Larry Summers

"A combination of spot selling and future refilling (if committed today) could flatten the curve and enhance the price signal received by US shale and other non-OPEC producers, but it remains to be seen if the Biden Admin is planning or even positioned to pull it off."

Commodity Context: Strategic Release

“The real price of nails fell by a factor of 10 from the late 1700s to the middle of the twentieth century, largely as a result of productivity growth in manufacturing.”

National Bureau of Economic Research: Tracking the Price of Nails since 1695

“Central banks have it easy when it comes to policing the prices of money in the nominal domain, but not when it comes to policing prices in the real domain of commodities, especially when pressures come not from demand, but supply, or rather, a supply shock caused by a collapse in demand for specific commodities, like Russian commodities (the market self-policing for fear of future sanctions). Central banks are good at curbing demand, not at conjuring supply.”

Credit Suisse: Money, Commodities, and Bretton Woods III