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The price movements of equities and risk assets were often impressive last week. The fallout from Russia's invasion of Ukraine was not taken into account and the Fed's 'hawkishness' became a case of 'buy the rumour, sell the news'. The financial markets were full of optimism. This was evidenced, for example, by the fact that European stock indices largely ended the week at the level they had on the day of the invasion. On the currency markets, the Swedish krona led the way last week. The Japanese yen was at the bottom of the G10 rankings as a safe haven. Emerging market currencies continue to post gains. Latin American currencies in particular benefit from their commodity-exporting economies and their remoteness from the war. It's worth noting that our favourite, the Brazilian real, is the best performer of any major currency so far this year, rising more than 10% against the dollar.
This week, the focus will be on the economic activity PMI indicators, which will be published on Thursday in the eurozone and the UK (where they are now called 'S&P'). These are the first indicators showing the impact of the invasion of Ukraine, so there is more uncertainty than usual. However, according to the market consensus, a retracement to levels that still point to strong economic growth will be seen. In addition, no less than six representatives of the Federal Reserve will speak publicly this week. We expect them to provide more clarity on the timeline and size of rate hikes. A sharply accelerated tightening cycle seems to be emerging in the US, but the dollar remarkably failed to benefit from the Fed's hawkish announcements last week. Finally, on Wednesday in the UK, we get the February inflation report, with numbers that are likely to be the highest in decades again. Below are the major currencies in detail.
In the eurozone, it was a quiet week, with only a (retrospective) report on industrial production in January and investor expectations deteriorated sharply but not unexpectedly after the shock of the Russian invasion. This index has not been very useful for predicting growth in recent times, but it is worth some attention. The common currency had a volatile week, but managed to rally and finish well above the 1.10 level against the US dollar. This week, both ECB President Lagarde and chief economist Philip Lane will speak publicly. The most important event, however, will be the release of the March flash PMI figures, which will give a first idea of the stagflationary impact of the war on the European economy.
The Bank of England gave the markets another 'head fake' at last Thursday's March meeting. Interest rates were raised as expected, but there was a 'dovish' dissent and the bank's statement was clearly revised 'dovish'. We do not think it would be wise to react too strongly to this change, as the MPC's announcements are rather unpredictable during this tightening cycle, but a downward revision of our optimism about the British pound is in order. We expect the inflation report due in the UK on Wednesday to be strong once again, with the highest numbers in the last 30 years in both the core and headline numbers. The Bank of England's dovish turn last week remains a mystery to markets.
The Federal Reserve reaffirmed its expectation that interest rates will be raised at every further meeting in 2022. The long-term forecasts were dovisher, but given the track record of these forecasts, we don't recommend relying too much on them. The lack of a rally in the dollar after this meeting is due to two factors. First, risk appetite has generally increased. That's bad for the dollar, which has been a safe haven since the start of the invasion of Ukraine. Second, markets feel that at current levels, much is already priced in and there is little room left for a further uptrend. This week will probably become clearer which of these factors weighs heaviest.
By: Enrique Diaz-Alvarez
Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.
About Ebury:
Ebury Makes international markets more accessible with tailor-made foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:
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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here to subscribe.
