HC-AM Morning Report - Morning Round-Up

Good Morning,

Here are this morning's headlines:

Dollar-Yen-The Dollar has been on an almost unprecedented run of form in the last few weeks and nowhere has this been more apparent than versus the Japanese Yen. This week the Yen broke a seven-year low and is now heading towards levels last seen twenty years ago, with central bankers seemingly unable to stop the haemorrhaging of value. The predominant driver is the interest rate rises coming out of the States and the value that’s creating for investors that are keen to leverage up in a cheap funding currency and invest in a higher yielding one. The ‘carry trade’ strategy here means that investors are selling Yen in vast quantities and buying US government debt that is returning a much greater return than its Japanese equivalent. This move is proving problematic for Japan, because there’s a lack of investors into their bond market, so the central bank has had to step in and pledge to buy an unlimited amount of ten year bonds, but also because Japan is a net energy importer and with a weakening currency it means that the 20% increase in the cost of a barrel of oil since the start of 2022?translates to a near 35% increase if you’re paying for it in Yen. The natural response to this predicament would be to raise interest rates, but this is something Japan hasn’t done in any meaningful way since 1990, so we’re not too sure they’ll be forthcoming and may prefer to think in terms of years and decades instead weeks and months.

IMF Growth Concerns- Following a similar assessment from The World Bank earlier in the week, the IMF have reduced global growth forecasts for 2022 to 3.6% (down from their forecast of 4.4% in January). This also represents a considerable slowdown from the post-pandemic recovery which saw global growth hit 6.1% in 2021.

Amongst countries set for a difficult year ahead are Russia whose GDP is expected to contract over 8.5% according to the IMF; Germany where the IMF forecasts 2.2% growth and Italy where 2.3% growth is predicted. The downgrade in growth is significant given that it was only in January when the IMF were predicting nearly 4.2% growth for Germany and 3.8% growth for Italy. However, their exposure to Russian gas supplies are expected to have a considerable impact on output and consumption, in addition to looming supply chain issues and soaring commodity prices. The IMF also reduced the UK’s growth forecast from 4.7% to 3.7%?which despite this being the second highest amongst G7 countries over 2022, they indicated that the UK will lag severely behind in 2023 and have the second slowest growth in the G20 (behind Russia) citing the fall in real incomes, Brexit and persisting inflation.??

The IMF also warned that soaring energy and food prices could exacerbate social unrest. In recent weeks and days, riots and protests in Sri Lanka, Peru and Spain have gown. Hence, given the impact that the war in Ukraine is having on the cost of wheat, the IMF are paying close attention to the situation across the Middle East where governments heavily subsidise the grain. For example, in Egypt 70% of the population depends on food subsidy programs and 80% of its wheat imports come from Russia and Ukraine. The government is therefore struggling to keep wheat prices low, which is troubling given that cuts in food subsidies and rising food prices were some of the drivers behind violent clashes in 1977, 2011 and 2017.

French Presidential Debate- Yesterday evening Macron and Le Pen went head-to-head in a mammoth presidential debate lasting almost three hours. Coming ahead of the final round of voting on Sunday, the debate focused on rising inflation, the conflict in Ukraine, climate change and immigration. According to a poll from the French broadcaster BFMTV and the newspaper L'Express, Macron performed more strongly overall than Le Pen as the polls appear to widen in the former’s favour. Indeed, earlier this week, three polls gave Macron an average of 55.83% of the votes – however the incumbent Prime Minister and member of En Marche, Jean Castex has warned against complacency. Nevertheless, Macron appears to be having some success in trying to ensure that the swing from Melenchon goes in his favour, with a poll indicating that 42% of?Melenchon's voters were now willing to vote for Macron – a figure which was up 7% from last week. This follows the left leaning Melenchon telling his supporters that they ought not lend a single vote to Le Pen, while not explicitly calling for them to vote for Macron. Hence, as France enters its final few days of campaigning, all eyes will be on the two candidates as they fight for the next five-year term.

Russian Aggression- Russia have released a video of an Sarmat super-heavy intercontinental ballistic missile being launched from a base in the northwest of the country. The missile travelled 5,500 miles across Russia to the far-eastern Kamchatka peninsula and while it was not carrying a nuclear payload, it is cable of doing so – and it is estimated that it can carry over ten (conventional) warheads on each missile. As Putin’s megalomania grows, the Russian military is setting its sights on Victory Day (9th?May) which marks the day when the Soviet Union flag was first raised over the Reichstag in Germany during the Second World War. Ever since, it has been a national holiday with military parades and chauvinistic speeches from various Presidents over the years. Hence, many are concerned that it may act as the impetus for Putin to up his military aggression in Ukraine as the Kremlin launched their fresh offensive across eastern Ukraine earlier this week.

Inflation Hits 6.7% in Canada- Inflation in Canada hit 6.7% in yesterday’s print, its highest level since 1991 and significantly above market expectations of 6.1%. This also puts inflation well above the previous level of 5.7% and follows the Bank of Canada raising interest rates by 50bp last week. Like with many other economies around the globe, high levels of inflation have been driven by the surge in the cost of gasoline (which is 39.8% higher y-o-y), food (which is 7.7% higher y-o-y) and transport (11.2%).

Given the rate of inflation, the prevailing market consensus estimates that the base interest rate could stand around 3% by this time next year in Canada which will be concerning for Ottawa given the cost of severing its debt, which currently stands at 117% of GDP.

Have a great day.

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