Credit Agricole

Asia overnight

Higher oil prices on the back of Russia’s demand that “unfriendly countries” pay for its energy exports in RUB dented sentiment in Asia. Further hawkish talk from FOMC officials also bruised sentiment. At the time of writing, most Asian bourses were trading lower, but S&P500 futures were in the green. In G10 FX, the Antipodean currencies were the underperformers, while the JPY, USD and NOK were the outperformers, the latter being supported by higher oil prices.

The biggest risk of all

In the immediate aftermath of the Russian invasion into Ukraine on 24 February, a gap opened between market measures of risk appetite like (inverse of) our FX risk index and global PMIs – that remained quite buoyant despite the triple threat emanating from geopolitical, stagflation and monetary tightening risks. Since then, the gap has started closing mainly because of the recovery in risk assets we have seen in recent days. The latter seems driven by expectations that the global economy could weather the geopolitical/stagflation storm at a time when the Fed is aggressively tightening policy.

Moreover, the rates markets seem to doubt that the Fed will ultimately fail to lift rates into restrictive territory and thus run the US and global economy into the ground as it struggles to contain inflation. Against this backdrop, today, FX investors will focus on global PMIs looking for any evidence that geopolitical risks, soaring energy prices and the tightening global financial conditions have dealt a blow to business confidence. Such risks are quite elevated in the case of the Eurozone PMIs (we also have the German ifo tomorrow), given the vulnerability of the economy to both the Ukraine war and high energy prices. In comparison, we see less pronounced risks to today’s UK and especially the US PMIs.

We therefore continue to believe that, despite its recent recovery, the EUR should remain a sell on rallies around current levels. Moreover, to the extent that weaker-than-expected PMI data today further upends the nascent risk rally, the USD could re-emerge as the high-yielding safe-haven king of G10 FX.

NOK: can it get an extra lift from a more hawkish Norges Bank?

In contrast to the SNB, the Norges Bank is set to deliver its well-telegraphed 25bp rate hike today, which would be its third of the cycle. Besides what looks like a done deal, attention should instead focus on whether the central bank is to raise tightening prospects, as it could be somewhat of a balancing act for new interim Governor Ida Wolden Bache. On the one hand, Norway’s frothier terms of trade and increasing evidence of stronger inflationary pressures across an economy already operating at full capacity back extra tightening. On the other hand, heightened geopolitical risks in Eastern Europe could call for caution.

Ultimately, the latter could hold the Norges Bank back from accelerating its rate hike pace from a 25bp rise every quarter just yet, while the eventual removal of an explicitly[1]timed near-term forward guidance would leave the door open to faster tightening. In the meantime, Norway’s stronger macro fundamentals and the Fed’s plan for an aggressive cycle could pave the way for more tightening from the Norges Bank further down the line, which could lift the terminal rate from the 1.75% planned in the December MPR and also supported by Stats Norway in its March forecasts. All in all, with a lot of good news already priced into the NOK as EUR/NOK has just fallen to three-year lows sub-9.60, the NOK may not get an additional near-term fillip, while a more hawkish Norges Bank could still cement longer-term gains.