FX Daily: Jobs Data, Monetary Policy And Energy Support Packages

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FX markets remain nervous, if a little calmer, as investors track the latest developments in the Middle East. US jobs data could be slightly USD negative today, as could any large energy support package from the US Treasury. We'll also want to see what central bankers make of all this and are interested to hear from the Fed's Christopher Waller at 1:30pm CET.

USD: Focus back on the US today

FX markets remain nervous, and we doubt traders are prepared to run any short dollar balances ahead of possible weekend event risk. Shipping remains at a standstill in the Strait of Hormuz. Every extra day of disruption hits energy production and increases the pressure on crude and gas prices to spike higher. For energy markets, the focus is what policymakers can do to alleviate the pain. The US Treasury has already announced a 30-day reprieve such that India can buy seaborne Russian crude. There is also a focus on other measures that the US Treasury could announce today, such as intervention in the oil futures market, where the April 26 US light crude contract is trading $15 above the March 27 contract.

Other measures in the frame include a release from the US Strategic Petroleum Reserve – our commodities team discuss that here. Perhaps the most controversial would be a 'gas tax holiday', or a temporary suspension of federal fuel duties on gasoline and diesel. That would be a big story – and probably a dollar bearish one – where lower gasoline prices could take the edge off inflation and allow the Federal Reserve to cut, while the long end of the Treasury market could sell-off on the fiscal hit.

Away from energy, today sees the January NFP release and retail sales. Consensus sees a decent +55k figure after the +130k number in January. A few are warning of a softer, possibly negative number based on the very cold weather in late January and early February. If so, the dollar could get hit briefly, but losses might not endure given the Middle East risk. We are also interested in what the Fed makes of all this. The Fed's Chris Waller, who dissented in January in favour of a 25bp cut, is on TV at 1:30pm CET today. Most likely he will push the case for a pause, which could provide a little support to the dollar. So clearly, quite a mixed story for the dollar today.

Unless there can be some real political breakthrough that leads to a ceasefire, the dollar won't be ready to resume a decline anytime soon and the story will remain one of governments trying to handle the fallout of high energy prices – a negative for bond markets around the world. 98.50-99.50 looks the DXY range today, and it looks too early for a sustained sell-off here.

EUR: ECB re-pricing offers the euro some support

Higher energy prices have seen the short-end of money market curves re-priced around the world. Interestingly, one of the largest repricing has emerged in the eurozone, where 1m EUR OIS ESTR, priced one year forward, has jumped 32bp. Repricing in the eurozone curve has actually been a little larger than in the US, meaning that two-year EUR/USD swap rate differentials have narrowed into 95bp – some of the narrowest levels since late 2024. So, while high energy prices are a clean EUR/USD negative, rate differentials are providing a modest offset. This could firm up the 1.1500/1530 area as near term support.

Today we are on the lookout for German factory orders data which could be showing some signs of 'shovels hitting the ground' on the back of German fiscal stimulus. Any improvement on the 13% year-on-year levels could be a mild euro positive.

Let's see whether EUR/USD trades inside yesterday's 1.1550-1.1650 range and thinks about building a base. But another big leg higher in energy could easily see EUR/USD hit new lows, and we doubt investors will want to chase EUR/USD higher on any soft US data given possible weekend event risk.

CEE: Governments indicate readiness to intervene in the energy market if necessary

After Wednesday's relief, the CEE market returned yesterday to sell-off mode under the influence of global sentiment. Rates receivers came under pressure again and saw another wave of selling, with Poland and the Czech Republic underperforming the most. On the other hand, FX remains relatively stable, and currency pairs did not surpass Tuesday's highs. The rates market was mainly driven by core rates and the sharp move in the EUR market; rate differentials remained almost unchanged at the end of the day. Still, differentials remain at elevated levels after the previous move and should keep FX under control in the coming days.

Further developments obviously depend on the duration of the US-Iran conflict and the development of energy prices, which remains uncertain. However, the first comments from central banks suggest that the current level of energy prices does not dramatically threaten inflation targets – but, of course, they do indicate caution. At the same time, we see comments from governments across the region signalling readiness to intervene in the energy market if prices were to be passed on to consumers.

It is clear that governments still remember the overwhelming impact in 2022, after the outbreak of the conflict in Ukraine. Therefore, it can be assumed that the impact of energy prices on inflation should be within acceptable limits and the bar for central bank rate hikes is very high, also because FX remains stable for now. The rates market should therefore have a ceiling where outpricing of rate cuts makes sense, but pricing in rate hikes should only come when we see a significant escalation of the conflict.

EM: And the losers are...

Our EM sovereign debt strategist, James Wilson, has published a new article on the EM winners and losers from the current oil shock. This from a hard currency bond market perspective. Looking from a local currency perspective, we can see the EM FX loser board topped by Hungary's forint, Chile's peso, South Africa's rand and then followed by quite a few of the Latam currencies. 2.5%-4% losses against the dollar have been seen this week. Energy deficits are the driving force here, but some of the Latam losses are more down to rising volatility hitting the carry trade. Here, high-yielding Latam currencies had been very much in favour.

It is probably going to take some time and some clear political breakthrough in the Middle East before volatility levels sink back to anywhere near where they were last week. But something like the Brazilian real, with 13% implied yield through the three-month NDFs, might be the first to see renewed inflows should conditions settle. One watch factor, though, would be whether President Luiz Inácio Lula da Silva, in any election year, tries to address high energy prices with fiscal support. That could trigger another leg lower in the BRL.

We would also keep an eye on the Polish zloty too. New plans to use profits on gold reserves to finance military spending could unnerve investors in the Polish bond market. Please see our Polish team's take on this story here.