FUNDAMENTAL BREAKDOWN – 27/02/22

USD

(Positive)

-March, which is going to be another significant month in the markets as the Fed will finally hike
interest rates, potentially starting a major tightening cycle this year as it tries to tackle surging
inflationary pressures.

-PCE price index rose to its highest level since 1982, well before I was born. It climbed to 5.2% year-
over-year in January, up from 4.9% in December.

-In the week ahead, we will get one last snapshot of the US non-farm jobs report and wages, while
the latest CPI measure of inflation will come out the following week, before the FOMC meets on
March 16. These figures might be deciding factor between a 25- or 50-basis-point rate hike. Here is
what’s on the agenda in the week ahead:

(Negative)

-We will get one last snapshot of the US no farm jobs report and wages before the FOMC meets on
March 16. If the data is healthy, it won’t move the market much as a 25 basis point hike is fully
priced in.

Conclusion:

Overall USD is fundamentally bullish with the highest PCE inflation reading we have seen.
Employment data may add to this. Must be careful of Russia tensions though.

If NFP data is not a crazy improvement then we may get a drop since market has already began to
price in 25bps hike in March.

Monday-

Tuesday –

Wednesday -

Thursday -

Friday -
EUR

(Positive)

(Negative)

-Divergence in the pace of monetary tightening by the Fed and the ECB has always been good for the
dollar.

-The EUR/USD went down as well. The markets feared that the “hot” phase of the Russian-Ukrainian
conflict would lead to further growth in energy prices and slow down the recovery of the European
economy.

-Tension between Russia and Ukraine heavily affecting EUR, will cause many supply issues, higher
inflation therefore

Conclusion:

Negative outlook if war tension continues

Monday-

Tuesday –

Wednesday -

Thursday -

Friday -

GBP

(Positive)

- The macro data released last week supported the British currency. This applies to both the labor
market and the consumer market. The unemployment rate in the United Kingdom remained
unchanged at 4.1%, which was exactly in line with the forecast. At the same time, the number of
applications for unemployment benefits decreased from 51.6K to 31.9K in January. Retail sales
added 1.9% after a 4.0% dip in December and are above the long-term trend level. All this is a
positive signal about the recovery of the country’s economy.

- Moreover, the British regulator is still in the lead, raising interest rates faster than its counterparts
on the other side of the Atlantic do.
(Negative)

-Dovish language: bank expects “further moderate tightening in the coming months if everything
goes as planned” and that “one needs to be careful in setting the rate level.”

- The growth in sales may not be due to an improvement in the economic situation, but due to pent-
up demand for goods and services, access to which was limited due to quarantine measures during
the COVID-19 pandemic. So, the upcoming steps of the British regulator are likely to be very
balanced. So as not to repeat the mistakes of the ECB, which rushed to raise the rate in May 2009,
undermining the economic recovery.

-GBP/USD would typically be expected to fall in times of global market turbulence and, despite being
uncharacteristic, Sterling’s losses against currencies like the New Zealand, Australian and Canadian
Dollars are a rational response by the market given the UK’s economic exposure to conflict in
Europe.

Conclusion:

Negative outlook for now

Monday-

Tuesday –

Wednesday -

Thursday -

Friday -

NZD

(Positive)

- A 25 basis points was delivered as expected, but it was the RBNZ's 'hawkish' tone regarding the
need for further rate hikes that helped stimulate demand for the Kiwi.

The RBNZ has now delivered three successive rate hikes and the Monetary Policy Committee said
in a statement the Official Cash Rate won't rest at 1.0%: "further removal of monetary policy
stimulus is expected over time given the medium-term outlook for growth and employment, and the
upside risks to inflation."

-rucially, the RBNZ also said it would commence the gradual reduction of the Bank’s bond holdings
which were made under its Large Scale Asset Purchase scheme (quantitative easing).

The RBNZ will sell assets at an annual pace of NZ$5BN from July, meaning the RBNZ not only leads
on the rate hike cycle but also on the quantitative tightening cycle.

-We are forecasting a move higher towards NZD/USD0.71 on a 3 month view

(Negative)

-War outlook

Conclusion:

NZD fundamentally is positive in terms of monetary policies, but risk off sentiment may not be kind
to it if the war continues. If war calms then expect NZD to be one of the strongest

Monday-

Tuesday –

Wednesday -

Thursday -

Friday -

AUD

(Positive)

(Negative)

-Due to the prolonged lockdowns in Australia and somewhat subdued 2.3% wage growth in the last
quarter, the RBA is likely to keep policy unchanged 0.1% at this meeting. The focus will be on the
language it uses to prepare the market for a hike around August. If it indicates an earlier rate rise,
then the Aussie could rally.

-Risk off war sentiment

Conclusion:

RBA not as progressive as NZD, but we need to pay attention to the language used. Risko off war
sentiment will go against AUD if it continues

Monday-

Tuesday – RBA Decision

Wednesday -

Thursday -

Friday -

CAD

(Positive)

-Russia’s invasion of Ukraine is not expected to keep the Bank of Canada from hiking interest rates
next Wednesday. Though added disruptions to global supply chains would eventually filter into
Canadian trade flows, and higher commodity prices will boost costs for energy and food products,
Canada’s direct trade exposure to Russia and Ukraine is small. The domestic economy is also too
strong—and inflation pressures too firm—to justify the current emergency levels of interest rates.

-Overall, tight labour markets and higher inflation rates all suggest the economy is running close to
longer run capacity limits. We look for the Bank of Canada to follow next week’s expected rate hike
with 3 more this year, the next coming as soon as April.

-BOC is expected to hike by 25 basis points, especially in light of the upsurge in oil prices and the
improvement in Canadian economic data of late.

(Negative)

-Risk sentiment

Conclusion:

Long term very positive, but can expect pullbacks due to this situation occurring politically

Monday-

Tuesday –

Wednesday – BOC decision

Thursday -

Friday -

JPY

(Positive)

-However, it should be noted that Yen and Swiss Franc had sharp rallies before close and would
remain strong on geopolitical risks.
-Japan’s GDP rebounded in the final quarter of 2021, with activity recovering after the state of
emergency that was in place for Tokyo and surrounding areas was lifted. Q4 GDP grew at a 5.4%
quarter-over-quarter annualized rate, with consumer spending especially strong.

(Negative)

-Long term very negative outlook

However, there are signs the economy has started on a soft note in 2022, and with inflation benign,
the Bank of Japan’s easy monetary policy looks set to remain in place for some time.

Conclusion:

Short term as this war news gets progressively worse, keep looking to buy this safe haven .

Monday-

Tuesday –

Wednesday -

Thursday -

Friday -

FORECASTS

USDJPY: Q1 – 114.00 Up

AUDUSD: Q1- 0.74 Up

GBPAUD: Q1/Q1: 1.80/1.78 Down

EURUSD- Q4- 1.10 Down

GBPUSD- Q1 – 1.33 Down

GBPCAD- Short until Q2/Q3

GPBNZD- Buy as GBP expected to outperform NZD (by ING expectations)

NZDUSD- Q4- 0.74 Up