Russia – Ukraine
Risk Holds In
Powell to Speak Later in the Week
We spoke last week of the path of least resistance being the USD higher and yields higher and that continues to be the main themes of the markets at the moment. The greenback has made fresh 2 year highs, especially against the low yielding currencies like EUR and JPY.
The dollar’s advance is simply down to rate differentials with hawkish rhetoric from the FED not easing up. Last Thursday we saw Fed member Williams – a typical dove – call for a 50bps hike. You then have the ECB reaffirming that longer run inflation targets (currently sub 2%) being important in setting monetary policy, thus more dovish. The BoE changed their focus from higher inflation to stiffening growth headwinds due to the Russia invasion of Ukraine which implies they will walk away from a hiking cycle after the next hike in May. Finally the BoJ has accelerated QE in order to keep ten year yields capped at 0.25%. Looking at what I have just written it is clear there are divergent paths with the FED leading the charge for higher rates – it is tough to see how the USD does not continue to outperform in the short term.
Crypto markets had a mini sell off over the weekend with BTC and ETH trading sub $39k and $2900 but has since bounced back as risk sentiment picked up with Asian stocks higher overnight. Terra has been the big winner over the past 24 hours, soaring c.17% but still well below its all time highs put in a couple of weeks ago. It feels as if the crypto markets are unnervingly calm and with crypto it feels what can’t go up must go down. BTC and ETH have been unable to get back above $42k and $3200 and it does feel and trade like crypto could have a look lower first before it resumes its path higher. It needs a fresh reason to look higher and unless we get crypto specific positive news I feel BTC may have a look at $35k before it does $45k.
With demand destruction seemingly the only way to tame inflation, we as a desk are finding it hard to be long of risk. We have lightened up our crypto positions and in FX are looking to buy USD dips. We have long advocated being long USD/JPY and will continue to look to buy dips as well as sell EUR/USD rallies.
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