The natural gas market isn't signaling any kind of imminent fear on a Russian gas cutoff but the FX market is growing
The natural gas market isn’t signaling any kind of imminent fear on a Russian gas cutoff but the FX market is growing more concerned about eurozone energy policy, inflation and growth.
Italy today said it wouldn’t veto EU sanctions on Russian gas. That’s an important shift from a country that’s highly-dependent on Russian supplies.
What’s clear to me is that sky high power and gas prices are here to stay in Europe. That will significantly ratchet down growth going forward and mute the covid recovery. In 2023 or 2024, eurozone countries will also need to get their fiscal houses in order as deficit rules go back into effect. That will add another headwind to growth and could trigger another sovereign crisis.
Meanwhile, there will be an investment boom in US LNG to ship to Europe and that will tilt the flow of funds toward the US in time.
What I think is most-telling is price action. A hawkish pivot at the ECB and high inflation sparked a strong move higher in the euro last week week. In just a few days, it’s been completely wiped out. To me, that says that the ECB isn’t going to be able to move the needle and without them, what’s the case for buying the euro?
Bank of America has been talking about a retest of 1.08 and I’m having a difficult time disagreeing.
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