News & Analysis


GBP price action was driven by external factors yesterday, despite the final reading of March’s services PMI displaying a substantial upgrade from the flash estimate. The data was revised upwards from 61.0 to 62.6, which ultimately lifted the composite measure from 59.7 to 60.9. Despite the revisions, the pound climbed higher as the dollar was broadly offered throughout the European session, however, comments by nominated Fed Vice Chair Brainard soon reversed the course for GBPUSD. Ultimately, the pound trimmed its gains to close out the session 0.08% lower against the dollar, while extending gains against the euro by 0.34%. Today, the pound’s focus will remain on how US Treasuries trade the release of March’s FOMC meeting minutes.


EURUSD dropped to fresh lows in yesterday’s session as comments from Federal Reserve members prompted a broad spike in the US dollar. This added to continued pressure on the single currency from Russia-Ukraine headlines and the prospect of increased sanctions from the West and contributed to the euro extending weakness overnight. The European Commission is working on a fresh pack of sanctions against Russia, including a ban on Russian coal, and on Russian ships entering EU ports. On top of this, they are working on banning oil imports, but this looks to be further away in the future. Germany’s government is facing growing pressure from its citizens and abroad to introduce an energy embargo against Russia, but this stance is proving particularly sensitive for the Baltic states and Poland. Prime Minister of Poland, Mateusz Morawiecki, accused Germany yesterday of standing in the way of harder sanctions against Russia. German Finance Minister Christian Lindner rejected a gas embargo and stated gas cannot be substituted in the short-term, as this would inflict more damage on Germany than on Russia. Euro traders’ focus will be on headlines around fresh sanctions, while outside of the eurozone, markets will watch the National Bank of Poland’s rate decision as they are expected to hike rates further by at least 50bps today.


The dollar spent most of yesterday’s European session drifting lower against the G10 currency board, with commodity currencies leading the way as sanctions risk increased expectations that the positive terms-of-trade shock would be more persistent for currencies like CAD, NOK and AUD. For the Aussie dollar, the tweak in the Reserve Bank of Australia’s policy statement helped the currency extend its gains to over 1.6% at a point throughout the day, however, the dollar’s losses soon reversed as a swathe of Fed speakers hit the wires. The most influential of which was nominated Vice Chair Lael Brainard, who came out and explicitly outlined that the Fed would start balance sheet reduction at the May meeting. Previously, the FOMC conducted quantitative tightening, the process of reducing the amount of assets on the central bank’s balance sheet, by passively allowing a specific cap of maturing US Treasuries to mature each month. During months where the nominal amount of maturing debt exceeded the cap, the Fed would reinvest the excess principal amount, while it would actively sell assets in the secondary market in months where the nominal amount maturing was below the set cap. Over the quantitative tightening cycle, the Fed progressively increased the cap amount, before abruptly halting the process in 2019 amid signs of liquidity strains within the financial system. This time around, owing to the larger size of the Fed’s balance sheet due to the pandemic, Brainard outlined that the Fed’s balance sheet plans would see larger nominal caps and also a faster increase in the caps over time. Given the weighted average maturity of US Treasuries on the Fed’s balance sheet has increased to sit at around 72.3 months, up from a historical average of 60.4 months that dates back to the 1980s, the sell-off in the bond curve was most concentrated towards the back-end in the aftermath of Brainard’s comments. The two-year yield rose by 10.4bps while the 10-year rose by 15.73bps, leading to a steepening of the US yield curve and to the 2-10 spread returning from inversion to positive territory.  In currency markets, the rise in US yields weighed most heavily on low-yielding G10 currencies, with EURUSD falling 0.61% on the day and USDJPY rising 0.19%, while the dollar also trimmed gains in commodity currencies. Today, all the focus will be on the Fed’s balance sheet as FOMC meeting minutes from the March meeting are released at  19:00 BST. Previously at the March meeting, Fed Chair Powell explicitly pointed toward the minutes for greater clarity on the Fed’s balance sheet plans. In the run-up to the release of the minutes, the dollar is likely to remain bid as equities feel the pain of rising Treasury yields across the whole curve.


The Canadian dollar ended the day virtually flat on Tuesday, which resulted in it being one of the better performers in the G10 space amid a fairly broad US dollar rally. In the morning, commodity currencies rose against the US dollar on mounting concerns that the EU would impose further sanctions on Russian energy. That trend reversed, however, after Federal Reserve official Lael Brainard made hawkish comments about inflation and quantitative tightening. Brainard said reducing inflation was of “paramount importance,” suggested that the balance sheet would shrink “considerably more rapidly than in the previous recovery,” and said the caps setting the maximum amount of assets allowed to roll off the balance sheet would be “significantly larger” this time around. She also said that quantitative tightening could start as early as the Federal Reserve’s next meeting in May. That’s largely consistent with our expectations for quantitative tightening, which we laid out ahead of the Federal Reserve’s March decision. We think that the cap will range between US$10bn and $US70bn based on a thorough analysis of balance sheet sizing and market liquidity. Brainard’s comments, along with a fall in US equities and subsequent haven bid, were the key reasons why the DXY broad US dollar index rallied during the North American session, unwinding the earlier fall in USDCAD. The calendar is empty today for Canada.



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