(Ipek Ozkardeskaya – Swissquote Bank Ltd)
The Russian natural gas is now bubbling somewhere in the Baltic Sea, being wasted in front of the horrified eyes of hundreds of millions of Europeans suffering from a historical energy crisis.
The European natural gas prices jumped 17% yesterday, while crude oil gained 2.30% on news that Russia now wants OPEC+ to cut output as deadlines to implement Russian fuel bans approach.
Plus, if the escalation on the energy front is not enough, governments of the four Moscow-occupied areas of Ukraine have all declared victories in the referendums with, of course, an unprecedented majority of residents saying YES to joining Russia.
The mounting tensions with Ukraine and the spike in nat gas prices fuel the European inflation expectations, but in vain. The EURUSD is pushing lower against the US dollar as recession worries mount.
The pound remains under a decent selling pressure as the Bank of England (BoE) officials are pushing the can down a very steep road, saying that it’s more appropriate to wait 5 WEEKS before taking action.
Even the safe haven assets are out of action right now. The dollar-swissy is about to test parity, as gold pushes lower as the dollar extends rally, and US yields rise.
The Fed officials make sure no one breath. But it is well possible that after having wrongly insisted that inflation was ‘transitory’, the Federal Reserve (Fed) could now making a second Big Policy Mistake of tightening beyond-appropriate.
The challenge after the BoJ intervenes in the JPY
(Giles Coghlan LLB, Lth, MA – HYCM)
When the BoJ met in September speculation had been increasing regarding BoJ intervention. The weakness in the JPY had been impacting Japan’s import market pushing up consumer prices and higher energy prices earlier in the year had been making it worse. So, when the BOJ met it was perhaps surprising that it did not even particularly try to weaken the JPY. However, it did that the following morning.
The BoJ kept interest rates unchanged and it maintained the yield curve control. It repeated the need to keep the powerful easing policy in place. The pandemic relief program was extended between 3-6 months depending on how the loans were made. However, there was no indication that FX intervention was imminent.
The rate statement was quickly eclipsed by the FX moves in the JPY. Those moves were affirmed by Japan’s Vice Minister for Financial affairs saying the Gov’t took decisive action in FX markets. You can see the impact of the BoJ’s intervention below in the USDJPY.
The difficulty here for the BoJ is that fighting market dynamics will be hard/impossible. The banks in recent history that have tried to intervene in their currency successfully against market forces have failed. Think of the SNB as a prime example when the EURCHF peg collapsed in 2015. So, if US10-year yields keep moving higher then the USDJPY pair can keep moving higher too. So, expect the market to test the BoJ’s resolve. On Friday the US Core CPI print will be released. If the print comes in below market expectations then the BoJ can breathe a sigh of relief as that should take the USDJPY pair lower in line with US 10-year yields. However, should the print come in higher then expect yields to rise and the USDJPY too. That will throw the ball back into the BoJ’s court and traders should watch for any further signs of intervention.