After the release of February’s CPI data at 07:00 GMT yesterday, losses in the pound progressively extended heading into the spring budget announcement. At 12:45 GMT, when Chancellor Rishi Sunak stepped up to announce the budget, GBPUSD was trading 0.64% lower. The budget largely passed by with little repricing in the pound, despite the immediate drop in Gilt yields due to the news of less issuance this financial year on the back of increased restraint overspending. Throughout the remainder of the session, the pound retraced slightly as Gilt yields came off of their intraday lows. The limited reaction in the pound was largely due to the fact that spending measures announced by the government failed to fully address the cost of living crisis that is set to play out this year, leaving the Bank of England’s path for raising interest rates in a precarious position. This morning, with the dollar still bid across the G10 space, the pound continues to trade under pressure. With the data calendar practically empty for the remainder of the week, barring February’s retail data released on Friday, sterling will remain at the mercy of the broad dollar. Only MPC member Catherine Mann is left to speak this week, but her comments this afternoon at 13:00 GMT are unlikely to stoke markets given the conversation is centred on the net-zero transmission.
Upside risks to eurozone inflation became more pronounced yesterday after Russia’s Putin declared that Russia will only accept ruble payments for gas from “unfriendly” countries in retaliation for sanctions imposed over his invasion of Ukraine. This move, if materialised, would technically remove the currency risk for Russian exporters, instead placing it with the importer. This puts the EU in a tight corner given their reliance on Russian gas. For the UK and US, this step would be far less disruptive due to their smaller import levels from Russia. The measures should see liquidity return in the offshore spot market for RUB at an absolute minimum as importers are forced to pay for new contracts in the Russian currency. Next to this, low yielding European FX would remain vulnerable. Elsewhere in Europe today, the NOK could benefit from the 25bp rate hike from the Norges Bank today and further hawkish guidance if the central bank also points to rising price and wage pressures, strengthening bets that the NB will accelerate hikes in the next quarters.
USD price action was mixed yesterday as the currency rose against low yielders and fell against petro-linked currencies, as markets digested Russia’s surprise request to some countries to pay for energy exports in rubles. This weighed on risk sentiment as a whole, similar to dynamics seen earlier in March where the war in Ukraine increased safe haven flows while at the same time, it notably strengthened commodity currencies like NOK, CAD, and AUD. Today’s calendar includes durable goods orders and PMIs for the US, however the focus will remain on discussions over energy export payments and developments in energy prices.
The Canadian dollar was almost unchanged from the previous day’s close on Wednesday. Despite trading in a 0.5% range, the USDCAD pair closed out the day just 0.06% lower. Meanwhile, investor exuberance fell with stocks down 1.23% on the day and the VIX volatility index edged higher. Oil rose almost 6 dollars a barrel to $115, helping the loonie stay put around recent highs despite the rally in the broad US dollar index, which rose 0.14% on the day. The 2Y yield differential was another mildly supportive factor for the Canadian currency as US yields fell nearly 7bps while Canadian yields only fell by 4bps. This has left the differential at just 0.0425, a stark reduction from the early March high of 0.1775. Today’s calendar is empty on the Canadian side of the border, while the US has initial claims and PMIs and a few more minor releases.