The euro is once again under pressure against the dollar and the francApr 6, 2022
- EUR/USD 1.0880
- DOW JONES 34,641.18
- USD/CHF 0.9325
- SMI 12,376.97
- EUR/CHF 1.0145
- WTI CRUDE OIL 102.20
- USD/RUB 84.50
- XAU/USD 1,921.00
The evolution of the EUR/USD has been strongly influenced by the conflict in Ukraine, so it is not surprising to see the pair under pressure again. So safe-haven currencies are on the rise as the euro approaches the low of the year at 1.0806 seen on 7 March. The EUR/CHF is also under pressure and is trading around 1.0150. After the events of this weekend in Bucha, Europe is hardening its tone and threatening Russia with fresh sanctions. French President Emmanuel Macron said a new round of sanctions was necessary and that there were clear indications that Russian forces had committed war crimes. The German Minister of Defence said that the EU should discuss stopping Russian gas imports despite its dependence, but the German Finance Minister is still refusing to do so because supplies cannot be substituted in the short term and losing them could shave off up to 3% of German GDP. The whole of Europe, which imports about a third of its natural gas from Russia, fears the economic impact of a total ban on Russian energy. For the time being, the proposed EU sanctions, which the 27 member states must approve, would ban the purchase of Russian coal and prevent Russian ships from entering EU ports.
Currencies are also being swayed by recent economic data, with some coming out as winners: the franc, as we mentioned before, is approaching parity against the euro. The loss of purchasing power in the eurozone and the US due to worrying inflation figures has investors piling into Swiss currency. In Germany, for example, inflation reached 7.3% in March, the highest level in over 40 years, compared to 2.4% in Switzerland. The reason is the surge in energy and food prices due to the war in Ukraine. Inflation also reached a new record high in the eurozone in March at 7.5%, also boosted by soaring oil, gas and electricity prices. Energy prices have risen by 31.7% over the past year. Per Christine Lagarde, a prolonged conflict in Ukraine will further increase the cost of living in Europe. Ms Lagarde considers that the war has simultaneously reduced growth and increased prices. This making things a lot harder for the European Central Bank as it tries restore the balance between containing inflation and supporting growth.
Oil prices nevertheless fell back last week in reaction to Joe Biden’s announcement that the US will draw 180 million barrels from its strategic reserves. The IEA member countries also decided to draw on their strategic reserves in an attempt to bring down prices. More than 30 countries have decided to put tens of millions of additional barrels of oil on the market. However, while the use of reserves may ease tensions in the short term, it will not solve longer-term problems. The imbalance between supply and demand is expected to persist and OPEC members will only increase production slightly in April. In the immediate term, these decisions have helped stabilise the price of WTI at around $100 a barrel, down from a year-high of $126.42 on 7 March.
On the monetary policy front, the market is awaiting the release of the minutes of the last Fed meeting on 16 March, which will be published this evening. Analysts will be looking for clues as to the extent of the next rate hike. Expectations are for 50 basis points at the next meeting on 4 May. On Thursday, the ECB will publish its rate, for which no hike is expected in the short term. Philip Lane, member of the ECB’s Executive Board, believes that inflation in the eurozone should stabilise around 2% in the medium term and that the European Central Bank should be able to gradually normalise its monetary policy by reducing its asset purchases. It is a sentiment shared by Klaas Knot who sees the end of the stimulus this summer and potentially the first rate hike this year.
In Australia, the central bank left the door open to future rate hikes at its monetary policy meeting yesterday. It held its key rate steady at 0.10% but noted that the labour market has seen stronger-than-expected wage growth. It is now preparing to end its fiscal stimulus programme and is no longer mentioning in its minutes the need for patience before considering a change of course.
At the end of the first quarter of 2022, the main financial centres are almost all in the red. To date, New York has lost more than 4%, and the Nasdaq more than 9%. In Europe, while London is slightly positive the losses can be significant for others. The EuroStox 50 and Frankfurt have lost more than 8%, Paris more than 7%, the SMI about 4%. In Asia, Shanghai has lost 14% due to the Omicron variant, while Tokyo and Hong Kong are down around 5%.