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Three Questions: Week of April 11

CalendarApril 11, 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. Will signs of demand destruction begin to appear in US inflation data?

US headline inflation is expected to hit 8.5 percent on an annualized basis in March, up 1.2 percent from February - more than sufficient to keep a front-loaded monetary tightening cycle on the table. Gasoline prices advanced in the month, food prices ratcheted higher, and housing costs likely continued to climb.

But price growth in several tangible goods categories could weaken as lifestyles revert toward pre-pandemic norms and wage gains lag price increases, crimping household spending.

Consumer buying patterns appear to be shifting, with spending growth decelerating, the Mannheim wholesale used car index beginning to drop, and bellwether furniture chains reporting a softening in sales.

Supply chains may be experiencing “bullwhip” issues, but anecdotal evidence collected from our corporate clients suggests businesses are finding it easier to source and ship products. Trans-Pacific container rates are down more than 20 percent from their January highs, and truckload freight prices are falling.

The word may have become unfashionable in central banking circles, but we still think there are good reasons to believe today’s high inflation will ultimately prove “transitory”.

If energy prices continue to tumble and price growth in the recreation, household furnishing, and used vehicle sub-categories begins to relax, Tuesday’s print could very well represent the high-water mark for this bout of inflation. Bets on consecutive jumbo-sized interest rate increases and ever-rising terminal rate expectations look vulnerable to correction – as does the US dollar itself.


2. Will the Bank of Canada’s 'double double' succeed in waking the Canadian dollar?

Tiff Macklem and his colleagues are likely to live up to every cliché about Canada’s Tim Horton’s coffee habit this week, ordering a double serving of monetary tightening with an upgraded inflation outlook stirred in - but markets are unlikely to feel any boost.

With unemployment near record lows, input costs soaring and capacity constraints beginning to bind, real interest rates are firmly negative and policy settings are uncomfortably loose.

Policymakers are expected to deliver a 50-basis point hike and an announcement setting out the Bank’s plan to passively unwind its balance sheet. The accompanying Monetary Policy Report is likely to include an upward adjustment in inflation forecasts, with projections for the fourth quarter jumping toward the 4 percent mark, up from the 3 percent estimated in January,

But these actions have been priced into markets since late March, when Deputy Governor Sharon Kozicki said, “I expect the pace and magnitude of interest rate increases and the start of QT (Quantitative Tightening) to be active parts of our deliberations at our next decision in April.”

The Canadian dollar continues to trade defensively as oil prices come under pressure and background volatility levels remain elevated. Without a sharp hawkish shift in the Bank’s forward guidance, Wednesday’s meeting is unlikely to provide a jolt sufficient to break the exchange rate out of its slumber. Currency traders – as always – might need more caffeine, with a little less cream and sugar.


3. Will the European Union move to ban Russian energy imports?

Atrocities in Ukraine are raising pressure on Germany and the EU to stop buying energy from Russia. The bloc is increasingly likely to cut imports of oil and coal sharply, but to move more slowly on natural gas – and this path will not be without risks to the European economy and the euro.

Europe produces some coal and can import more as bulk freight. If countries are willing to pay a premium, tankers of crude oil can be rerouted from global markets. But gas is tied to existing pipeline infrastructure or to specialized terminals capable of receiving shipments of liquid natural gas (LNG).

The European Commission estimates that stopping gas imports would cut euro area gross domestic product by at least 2 percent, disrupting supply chains, raising inflation, and lowering household consumption.

Mediterranean nations can substitute for Russian supply - they receive gas from North Africa by pipeline and at LNG terminals that tie into global markets.

But Germany is particularly vulnerable. Gas accounts for 25 percent of overall energy use, and pipelines from Russia deliver two-thirds of consumption. Internal energy sanctions estimates put the cost to the country above 3 percent, with the industrial sector likely to suffer substantial losses.

Timing will be critical. Warm weather will reduce the bloc’s demand for heating, but the European Commission has proposed legislation that would require rebuilding natural gas inventories to 80 percent of storage before the onset of winter. A game of chicken could unfold in coming weeks as European diplomats try to build consensus and Russia threatens to fire the “gas weapon” first by reducing or cutting supplies - particularly where these are aimed at building EU resilience.




 GBP Claimant Count Rate, March

USD Consumer Prices, March

CNY Trade Balance, March


GBP Consumer Prices, March

CAD Bank of Canada, Rate Decision

CAD Bank of Canada, Quarterly Monetary Policy Report

USD Department of Energy Weekly Inventories


EUR European Central Bank, Rate Decision

USD Retail Sales, March

USD Weekly Jobless Claims

USD Baker Hughes Weekly Rig Count


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