Germany has been heavily reliant on Russian gas imports and the flow-on effect is we could be looking at gas rationing through the European winter and a potential bailout of Germany’s largest gas importer (Uniper).
A recession in Europe looks all but certain this year, and this makes the ECB’s life incredibly challenging – they have a deteriorating growth outlook, very high and persistent inflation and worries about peripheral bond yields blowing up. EU Nat gas (NG) prices are not something they can control, and we’ve seen prices rally 100% in the past 16 days, so this is a brutal juggling act for Europe – Europe is in the eye of a storm right now, especially with China maintaining a strict line with its Covid zero policy. News that airline SAS has filed for bankruptcy won't help matters either.
Europe may command the closest attention, but this is a global problem. In a world of rising interest rates and central banks hellbent on putting the inflation genie back in the bottle, we’ve seen clear evidence of demand destruction – commodities have been the default expression of this thematic and right now there is just no visibility on growth or what changes the trend – even though the market lives in the future, it feels like this gets worse before it turns around.
The result is no one wants EURs, or GBPs, and commodity currencies (AUD, NZD and NOK) find few friends either – the trend really is one’s friend and everyone asks when EURUSD hits parity.
So the USD reigns supreme, not just from a relative growth perspective but from an attractiveness as an investment destination. Right now, aside from the USD, only the JPY looks like a compelling long in G10 FX. What’s clear is that the USD strength is feeding back again into negative commodity price action – commodities face a war on two fronts – demand destruction and king USD and this is causing some intense bear trends in commodities, and it wouldn’t be a stretch to think the systematic trend-following crowd would already be running hefty short positions in Copper, Silver, Gold, US gasoline and AG’s like Wheat and Soybeans.