MNI US MARKETS ANALYSIS- EUR Firms as Villeroy Eyes Weak Currency

US TSYS SUMMARY: Measured Bear Steepening With Busy Schedule Ahead

• Cash Tsys see a measured bear steepening ahead of payrolls, a heavy schedule of Fedspeak plus both ECB’s Elderson and Rehn still to come.
• The move slowly unwinds a late flattening yesterday, pushing 2s10s back to 36bps after touching 38bps yesterday.
• Real yields continue to have driven the move higher in nominal yields whilst the inflation breakeven has slowly drifted lower after the initial lurch higher on the FOMC announcement and presser.
• 2YY +1.9bps at 2.723%, 5YY +2.6bps at 3.034%, 10YY +3.8bps at 3.075% and 30YY +3.9bps at 3.159%.
• TYM2 sits 3 ticks lower at 117-31 on above average volumes. The outlook remains bearish after clear break of the 118-08 Apr 22 low yesterday. Next support is eyed at yesterday’s low of 117-26 with resistance at 119-22+ (20-day EMA).
• Data: The payrolls report for April dominates with the only other release consumer credit late on.
• Fedspeak: Heavy schedule with 2x permanent voters, 1x’22 voter, 1x ’23 voter and 2x’24 voters and with potential for unscheduled appearances on the first day after the media blackout.

STIR FUTURES: Fed Hike Expectations Firm For Upcoming Meetings

• The Fed Funds rate implied by FOMC-dated futures has ground higher for nearer-term meetings, in a slight probe of Powell’s 50bp on the table over the next couple meetings (56bp Jun, 104bp Jul before 146bp for Sep).
• 200bp of hikes over the five meetings to year-end, leaving an implied rate of 2.84%, back at levels from Tuesday but still 14bp below the Wed high.
• Payrolls preview: https://marketnews.com/markets/pdfs/mni-us-payrolls-preview-labor-supply-seen-limiting-jobs-gains
• Post-FOMC Fedspeak kicked off by NY Fed’s Williams (voter) at 0915ET followed by Kashkari (’23), Bostic (’24) before late appearances from Bullard (’22), Waller (voter) and Daly (’24).

Fed Funds rates implied by FOMC-dated futuresSource: Bloomberg

EUROPE OPTION FLOW SUMMARY:

Eurozone:
RXM2 152/150ps sold at 61 in 3k
RXM2 154.50/152ps 1x2, sold at 52 in 1.75k

IKN2 124.00/121.00ps vs 125.50/126.50cs, bought the ps for 46 in 10k

ERU2 99.87/99.75/99.62/99.37 broken put condor bought for 2.25 in 29k
ERU2 100.99.87/99.75p fly, sold at 1.75 in 10k
ERU2 99.75^ bought for 26.5, 27, and 27.5 in 12.5k total
ERZ2 99.25p, sold at 20.5 up to 22.25 in 15.9k
ERZ2 99.25^, bought for 47.5 in 4.5k

ECB/EUR: Single Currency Strengthens as Villeroy Eyes Weak EUR

The EUR is now one of the strongest currencies in G10, erasing overnight weakness as markets eye hawkish comments from ECB's Villeroy. One of the more notable comments from Villeroy was on FX, where he stated that the ECB "must watch FX; too weak a EUR jeopardizes their price stability objective".

Looks like a possible step-up in language on currency from an ECB member - recent comparable comments are:

• Schnabel on May 3: "Through the higher cost of imports, this has effects on inflation, which we are closely monitoring. But we do not target the exchange rate."
• Lagarde on April 14: "ECB always attentive to FX move, didn't discuss today"
• Visco on March 23: "ECB taking into account FX rate when taking decisions"

Norges Bank Review: June Primed for Next Hike

• The Norges Bank stuck to their guidance and kept policy rates unchanged at 0.75% in May. Again, the bank name-checked the June meeting as the next most opportune time to tighten policy, thereby signalling a further three hikes this year, which should bring end-2022 rates to 1.50%. There was little market response to the decision itself, with pricing still eyeing March’s rate path, which sees policy rising well north of neutral, to 2.50% by end-2023.

• The accompanying policy statement added few fresh clues for the upcoming June rate path revision, but the language around the economic situation left the door open for a further upward revision in projections across the coming months. While an interim meeting hike or a move of more than 25bps remains unlikely, a further focus on the wage-price spiral in coming meetings could prompt markets to re-price more hawkishly.

FOREX: EUR Stronger as Villeroy Eyes Currency Weakness

• The EUR is one of the strongest currencies in G10 early Friday, erasing overnight weakness as markets eyed hawkish comments from ECB's Villeroy. One of the more notable comments from Villeroy was on FX, where he stated that the ECB "must watch FX; too weak a EUR jeopardizes their price stability objective" - marking a possible step-up in language on currency from an ECB member.
• EUR/GBP trades a new multi-month high, touching 0.8565 and nearing the next bull trigger at the December 2021 high of 0.8600. In tandem, GBP/USD has touched a new multi-year cycle low of 1.2276.
• Moving in tandem with equity markets (indices are lower again in Europe), AUD is the poorest performer in G10, with AUD/USD through yesterday's low and eyeing the May 2 low at 0.7030. Weakness through here opens the lowest levels since January - this level has been defined as key support and the bear trigger.
• Focus turns to the Canadian and US jobs reports, with markets expecting +380k jobs added across April for the US, which should pressure the unemployment rate to 3.5%. Meanwhile for Canada, analysts see 40k jobs added across the month, dropping 0.1ppt from the unemployment rate.

FX OPTIONS: Expiries for May06 NY cut 1000ET (Source DTCC)

• EUR/USD: $1.0425-30(E550mln), $1.0570-75(E523mln), $1.0600(E581mln), $1.0650(E782mln), $1.0700(E569mln)
• GBPUSD: $1.2450(Gbp542mln)
• EUR/GBP: Gbp0.8500-10(E551mln), Gbp0.8575(E755mln)
• USD/JPY: Y128.50($1.1bln)
• AUD/USD: $0.7100(A$765mln), $0.7200(A$931mln), $0.7300(A$2.1bln)
• AUD/NZD: N$1.1000(A$509mln), N$1.1050(A$507mln)
• USD/CAD: C$1.2700($639mln), C$1.2750-60($934mln), C$1.2800($991mln), C$1.2840($1.4bln), C$1.3055($1.7bln)
• USD/CNY: Cny6.6500($630mln), Cny6.7000($1.5bln)

Price Signal Summary - Equity Space Remains Vulnerable

• In the equity space, S&P E-Minis reversed course Thursday having failed to clear resistance 4303.50, the Apr 26/28 high. The move lower reinforces underlying bearish conditions. Attention is Monday’s low of 4056.00 where a break would confirm a resumption of the downtrend and open 4000.00. EUROSTOXX 50 futures remain in a bear mode. The contract has traded lower today and probed support at 3608.00, the Apr 27 low. A clear break of this level would confirm a resumption of bearish activity and clear the path for a move towards 3551.60, 61.8% retracement of the Mar 7 - 29 rally. Initial resistance is at 3784.90, the 50-day EMA.
• In FX, EURUSD remains in a downtrend. Recent price action appears to be a bear flag. A resumption of the downtrend would open 1.0454, the Jan 1 2017 low. Resistance is at 1.0695, the 20-day EMA. GBPUSD remains vulnerable following yesterday’s sharp sell-off that confirms a resumption of the primary downtrend. This signals scope for a move to 1.2252 next, the Jun 29 2020 low. USDJPY trend conditions are unchanged and the primary uptrend remains intact. The focus is on 131.96, the 1.00 projection of the Feb 24 - Mar 28 - 31 price swing.
• On the commodity front, Gold remains vulnerable, despite this week’s recovery. The recent pullback from the $1998.4 high (Apr 18), and the breach last week of $1890.2, the Mar 29 low, continues to highlight a bearish threat. Attention is on $1848.8, 76.4% of the Jan 28 - Mar 8 rally. On the upside, $1910.4, the 20-day EMA is seen as a firm short-term resistance. In the Oil space, WTI futures maintain this week’s bullish tone. Price has broken out of its triangle - to the upside - and this does strengthen the short-term condition for bulls. Attention is on resistance at $109.20, the Apr 18 high, that has been probed. A clear break would open $113.51, the Mar 24 high.
• The trend direction in the FI space remains down. Bund futures are trading lower today as the downtrend extends. This signals scope for weakness towards 150.15 next, the 0.764 projection of the Mar 7 - 29 - Apr 4 price swing. The broader trend condition in Gilts remains bearish and price is trading below resistance at 119.79, the Apr 26 high. Attention is on the bear trigger at 117.22, the Apr 22 low.

EQUITIES: US Futures Resume Descent

• Asian equities closed mixed: Japan's NIKKEI closed up 185.03 pts or +0.69% at 27003.56 and the TOPIX ended 17.56 pts higher or +0.93% at 1915.91. China's SHANGHAI closed down 66.198 pts or -2.16% at 3001.561 and the HANG SENG ended 791.44 pts lower or -3.81% at 20001.96.
• European stocks are sharply lower, with Energy the only sector in the green: the German Dax down 175.41 pts or -1.26% at 13732.86, FTSE 100 down 58.14 pts or -0.77% at 7443.88, CAC 40 down 76.08 pts or -1.19% at 6292.83 and Euro Stoxx 50 down 53.42 pts or -1.45% at 3644.95.
• U.S. futures are descending again, with the Dow Jones mini down 86 pts or -0.26% at 32824, S&P 500 mini down 15.25 pts or -0.37% at 4128, NASDAQ mini down 66.25 pts or -0.52% at 12791.75.

COMMODITIES: Energy Prices Higher, Defying Broader Market Risk-Off

• WTI Crude up $1.74 or +1.61% at $109.97
• Natural Gas up $0.08 or +0.89% at $8.861
• Gold spot up $4.23 or +0.23% at $1881.8
• Copper down $0.4 or -0.09% at $428.75
• Silver down $0.07 or -0.31% at $22.4342
• Platinum down $27.08 or -2.75% at $958.5