Oil, Gold and Japanese Yen Analysis – More Sanctions Are on the Way

Markets Fundamental Analysis

Equities are rallying to start the week – with minimal developments on both the geopolitical and Covid fronts. Despite the bounce back in stocks, there is still much concern over pieces of the UST curve that remain inverted – namely the 2s10s and the 5s30s

The European Union is considering additional economic sanctions against Russia following allegations of atrocities. Unless the sanctions target energy supplies to Europe or firms from other countries doing business with Russia, the marginal economic impact will be limited.

Oil Fundamental Analysis

In the wake of “Russian atrocities” claims and the ensuing public outrage, there is a strong chance we could see another layer of sanctions on Russian energy.

The receptiveness on the part of Europe (including Germany) to refrain from importing Russian gas has put a bid under and should keep energy prices supported. Still, Volatility was more limited than usual at the front end of the curve.

However, there was a sharper than usual rise in the back end following the US announcement of the SPR release as the market expects those reserves to get topped up.

This week’s focus will be on the 5th EU sanctions package against Russia, energy sanctions are expected to be discussed on Wednesday.

Gold Fundamental Analysis

No progress in peace talks and the ongoing inversion of the UST 2s10s curve offers some focus on a complicated macro-environment that encompasses war, commodity price inflation, a covid lockdown in Shanghai, and unpredictable monetary policy reaction functions.

During these uncertain times, gold remains supported as a critical portfolio hedge that will shine during the most challenging juncture when inflationary pressures remain strong but growth slows. Although the US yield curve is walking us down that gloomy path, that point has not been reached yet.

FOREX – Japanese Yen Fundamental Analysis

This morning’s comments from the Bank of Japan Governor Kuroda hint at some unease with the yen moves of late. Japan’s corporates tend not to welcome higher FX vol due to higher hedging costs, and Kuroda has this audience in mind.

There is nothing to suggest that the BoJ will step away or loosen the shackles of its YCC policy, with Kuroda noting that raising the 10y cap from 0.25% would reduce monetary easing effects.

The verbal intervention started last week, but any FX intervention does not have lasting legs and typically only offers a better level to sell JPY unless accompanied by a policy twist.

With that in mind, all eyes are on the next BoJ policy meeting on April 28. But in the meantime, unless there is a shift lower in US front-end rates, we should expect a weaker JPY glide path.

For a look at all of today’s economic events, check out our economic calendar.