EU backfired by restrictions on Russia

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The international gold price remained within a narrow range and fluctuated in a narrow range. Although the Federal Reserve reiterated its positive stance on fighting inflation, the uncertainty of the conflict in Ukraine limited the decline of gold. The U.S. dollar index hit 99.778 overnight, its highest since May 26, 2020, after the minutes of the Federal Reserve’s March meeting showed it was ready to act aggressively to stem inflation. A strong dollar makes gold less attractive to holders of other currencies.

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Hungary said it was ready to pay Russia rubles for gas, a move that disrupted the EU. The EU has been seeking a united front against Moscow's demands to pay for gas in rubles. Hungary will pay in rubles if requested by Russia. Russian President Vladimir Putin has warned Europe that unless it pays the ruble, it faces the risk of gas supply disruptions. Putin is seeking revenge for Western sanctions over Moscow's invasion of Ukraine. With the payment date still weeks away, the European Commission said countries that signed contracts requiring payment in euros or dollars should stick to existing contract terms.

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Minutes of the Fed's policy meeting showed policymakers in March "universally agreed" that it may be appropriate to cut $60 billion in U.S. Treasuries and $35 billion in mortgage-backed securities (MBS) per month from the balance sheet, within three months "or" gradually over a longer period of time"; participants also "generally agreed" that it would be an appropriate time to consider a sale of MBS when the debt reduction process is fully underway. The minutes also showed that no final decision had been made, but policymakers at the meeting had made "substantial progress" and could "begin the balance sheet reduction process as early as after the May 3-4 policy meeting."

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The Australian dollar remains the strongest currency in the G10 since the Russia-Ukraine conflict, followed by other commodity-linked currencies. Clearly, the extraordinary surge in energy and metal prices has reinforced Australia's already large trade surplus. Nonetheless, the RBA is slowly moving towards starting to tighten policy, in stark contrast to the FOMC's public consideration of a 50bps rate hike. Additionally, CFTC positioning data shows that many AUD shorts have now been liquidated, which should help AUD/USD stay in the 0.7650-0.7700 area in the near term, although we expect a slight dip in the next few months.

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EU diplomats have failed to approve new sanctions against Russia proposed by the European Commission over technical issues, including whether a coal ban would affect existing contracts. The European Commission has proposed a ban on all types of coal imports from Russia, part of a broader package of measures to further restrict trade with Russia. Sanctions require approval from EU governments, but concerns were raised by officials at a meeting of EU envoys on Wednesday. Germany has raised a key question, with Berlin wanting clarity on whether the coal ban will affect existing contracts or only future ones. Germany is the EU's largest importer of Russian coal. If the ban only applies to new contracts, Russia could still export coal to the EU for a long time. A spokesman for Germany's envoy in Brussels declined to comment. The European Commission has proposed a 90-day transition period for existing coal contracts, EU officials said.

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Ukrainian President Volodymyr Zelensky urged Western nations to respond decisively as Europe divides as Russian troops continue to bomb Ukrainian cities, the United States has announced more sanctions on Russia after the killing of civilians was widely condemned as a war crime. The new measures announced by Washington include sanctions on the two adult daughters of Russian President Vladimir Putin. U.S. Treasury Secretary Janet Yellen said Wednesday that President Biden wants to expel Russia from the Group of Twenty (G20) group of major economies. The U.S. will boycott "some G20 meetings" if Russian officials show up in Indonesia. Zelensky, however, was critical of some Westerners and said he would not tolerate "any indecision." "The only thing we're lacking is a principled approach from some leaders - political leaders and business leaders - who still see war and war crimes as less terrible than economic damage."