ECB asking EU banks about interest rate hedges

Good morning

All reasonably quiet in the currency markets, EURUSD and GBPUSD had dipped yesterday afternoon reaching 1.0965 and 1.2390 respectively, but as I type we are seeing some USD selling taking the two pairs to 1.1020 and 1.2450.

I mentioned renewed concerns over the US regional bank First Republic, but what I hadn’t expected was a halving of their share price from $16.00 to $8.00 yesterday. As with SVB, it reaches a point where continuing business could become nigh on impossible. The banking crisis is far from over as investors continue to withdraw cash from any institution deemed at risk, which in turn compounds any pressures those banks are facing.

ECB are now asking EU banks not only whether they have hedged against interest rate risk but also which counterparties they had backed off their risk with. With ECB officials still talking up the chance of more rate rises, there are clear concerns that EU banks may face the same issues the US banks have faced.

BoEs Pill has said UK citizens need to accept they are poorer amid rising prices, rather than demand higher wages which Pill says will only prolong the pain of higher inflation.

Mixed Aussie inflation numbers overnight has seen AUD slip a little with GBPAUD now up at 1.8825, another new high since Feb 2022. RBA have already said they think inflation has peaked, market pricing in no change for the next RBA rate meeting next week. UBS take a different view, they see a chance RBA will raise rates again next week despite the slight dip in Q1. Maybe worth buying a cheap one week upside AUD just in case, the 3 May 0.6700 AUDUSD call cost just 15 usd pips (ie £1200 per AUD1m notional, or the same expiry 1.8700 GBPAUD put costs £1500 per AUD1m notional.

It’s a very light calendar today with really just US durable goods on the table. Our structured currency purchase programs see positions for April expire today. It has been a while since I sent results to those not participating in the programs, but they do still run and have performed well during the market turmoil at the tail end of last year, into this year.

Arsenal take on Man City this evening in what is touted as the key match in the title race, particularly after Arsenal’s failure to beat last place Southampton on Friday. This has the potential to be a great match with two teams who have both played some attractive, flowing and high-scoring football this season. It isn’t quite make or break for the title but the winner will certainly walk away knowing they have the upper hand.

- 13.30 US durable goods orders

US dollar softer with Fed officials in blackout period

Good morning

Every time I have written recently ‘EURUSD unable to break 1.10’, it has followed up later in the day with a move above 1.10. ECB officials have been pretty hawkish, with comments along the lines of ‘its not the time to pause’ or ‘a few more rate rises will be needed’. Fed officials on the other hand are still in the blackout period ahead of the next FOMC meeting it would seem that the market is considering a more dovish outcome this time around and US dollar has suffered as a result. GBPUSD pushed steadily higher yesterday , eventually topping out around 1.2505 overnight, now 1.2465, while EURUSD managed to get to 1.1065 overnight, only in the last few minutes has it fallen back to 1.1030. GBPEUR 1.1300.

There seem to be a lot of reports of job losses over the past few weeks, particularly from the US. The likes of Twitter and Amazon have announced culls, now its Disney’s turn who are looking to shed some 7,000 jobs, while the US regional banks such as First Republic are also talking of decent-sized staffing cuts. I now wish I’d kept a record of all those I have read about, I think the actual numbers would be quite worrying.

BoJs Ueda has been speaking again ahead of his first BoJ policy meeting. He did say that BoJ would consider raising rates if appropriate but for now no changes are expected and I’d imagine he will not want to do or say anything that will create unnecessary volatility.

AUD is a bit lower ahead of its CPI release due overnight, GBPAUD trading above 1.85700 as I type, which I think marks a high since Feb 2022. GBPNZD also making highs up at 2.0250, we were briefly above that level back in Oct 2022.

Gold is not benefitting from this recent spell of a weaker USD. It trades now at $1990/oz, some $60/oz lower than recent highs, I’m yet to see any decent explanation as to why this may be. Bitcoin is also failing to capitalise on the USD weakness, that sits now at $27250, over 10% lower than a couple of weeks ago.

I have an old school friend staying with us from New Zealand. I took him to London for the dawn ANZAC ceremony which started at 5am, so we were in the car around 4am. It was freezing! I thought the days of frost on the windscreen were behind us now we’re nearly in May but I appear to have been mistaken. I don’t often drive into London these days. Even at that early hour with limited traffic the roads were quite busy, not helped by the fact the A40 was closed and 30mph speed limits that seem to stretch further and further out of London.

Driving with open(ish) roads at 30mph is very difficult and with average speed cameras in abundance there is no chance of the odd bust of speed to relieve the boredom. Yes, I know, safety first and all that, but I do look back fondly on the days we used to be able to do 70mph into London almost until we hit (not literally) Baker Street.

- 14.00 US housing prices

- 15.00 US consumer confidence, new home sales

- 23.45 NZ trade balance

- 02.30 AUS CPI

Lets not talk about football...

Good morning

GBPUSD is at 1.2420 as S&P revised UKs ratings from negative to stable. They see the risks to the UK economy have reduced since the budget debacle back in September 2022. There are still major concerns over inflation, BoEs Ramsden said over the weekend that they must ensure inflation doesn’t become embedded in the economy. The market is pricing nearly 75bps of more rate rises to come this year. On the other side of the pond though, S&P downgraded eleven regional US banks who they say are feeling the strains of managing their liabilities.

ECBs Wunsch says markets are underestimating how high ECB rates will go, he says they could hit 4% and will only stop once wage growth starts to fall. The Fed on the other hand are likely to offer one more rate rise of 25bps at their May meeting but it is then thought this rate rise cycle could end. We won’t hear from Fed officials until the FOMC meeting next week. EURUSD is trading up at 1.0980 but so far still struggling to get back over 1.1000.

BoJ are planning a comprehensive assessment of policy. Any serious change to the policy that has been in place since pretty much 1999 will take a good amount of time and planning. Ueda has been talking about BoJs eventual exit from its ultra- loose policy, adding that BoJs large EFT holdings will become an issue at some stage. USDJPY holds above 134.00, currently 134.25, GBPJPY up near 167.00. Ueda will hold his first policy meeting later this week but it is highly expected there will be no major changes in policy. Still see interest in long yen positions but it is expensive to be long yen, as such positioning for a move lower in UDSJPY, EURJPY or GBPJPY probably doesn’t meet the full potential.

The FA Cup final will be an all-Manchester affair this year as both Utd and City won their respective semi-finals, Man Utd only just overcoming Brighton after a penalty shootout that saw twelve penalties scored in a row, the unlucky thirteenth was missed by Brighton. Other than that we don’t really talk much about the weekends football after a shocking display from Spurs that saw them three goals down inside the first ten minutes, eventually losing 6-1.

I assume you all got a test alert on your mobiles yesterday afternoon. The fact that is came at half time in the Spurs match obviously led to the usual raft of funnies about the alert announcing a pending disaster for Spurs. But seriously, we hope that the alert system will never have to be used but I guess its good to know its there just in case.

Not a lot on the calendar today, it does get busier later in the week, for now though there is something of a holiday feel to the day, helped in part by the rather bright sunshine I see out of the window. Its not expected to last the whole day mind you so enjoy it while it lasts….

- 09.00 German IFO

- 10.00 ECBs Panetta speaks

- 13.30 US Chicago fed national activity index