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The American intelligence services were right after all: Putin launched a full-scale invasion of Ukraine in the night from Wednesday to Thursday. Over the next two days, the markets spun in all directions. On Friday, there were finally rallies in most risk assets, which were fueled by the idea that a complete cutting off of Russia from the financial world could be avoided with Western sanctions. At the time of writing, this is already outdated: over the weekend, Western sanctions escalated and Putin put units with nuclear weapons on heightened alert. Early Asian trade is now witnessing a flight to safety again.
Two lines can be seen in last week's developments. First, the U.S. dollar is back as a favorite safe haven. This was also true of the Swiss franc and the Japanese yen, but to a much lesser extent. Secondly Commodities rallied, with the energy complex leading the way, and also the currencies of commodity-exporting countries (with the exception of the ruble, of course). The exchange rate of the Norwegian krone rose sharply against all other currencies in the world.
Markets will now be determined, of course, by developments in Ukraine and Russia, but also by the central banks' response to the crisis, which is likely to increase inflationary pressures and create new downside economic risks, especially in Europe. The outlook is extremely uncertain, but we will do our utmost to keep you informed of the most important developments. Below are the main currencies in detail.
For the euro, the key question now becomes to what extent the ECB will postpone the tightening of its policy in response to the war in Ukraine. The tougher sanctions announced over the weekend increase the risk of disrupting Russian energy supplies to Europe. This increases inflationary pressures and is detrimental to productive capacity across the economy. Normally, the trading week would be determined by the inflation data, which will be released on Tuesday, but this week the developments in Russia and Ukraine and the reaction of ECB representatives to them are of course much more important.
The British pound struggled very badly last week, lagging behind all other G10 currencies. In addition to the flight from riskier assets, there were attempts by Bank of England representatives to downplay the significance of the fact that four MPC members voted in favour of a 50 basis point rate hike at the last meeting. There is not much news on the agenda this week. Trading in the pound will therefore mainly be determined by developments in risk assets (read: geopolitical developments).
The economy of the United States is quite autonomous and not dependent on energy supplies from Russia. It is likely to be able to absorb the long-term consequences of the war in Ukraine and the drastic sanctions announced by the West relatively well. It is therefore not surprising that the dollar is the preferred safe haven of all major currencies. Last week, we faced another upside inflation surprise, this time in the form of the PCE number. This week we get the non-farm payrolls. These are also expected to be very strong, and point to strong wage pressures. As in the case of the ECB, there are still significant doubts as to whether the Fed can afford to delay the end of monetary accommodation any longer, given the latest inflation shock. Fed Chair Powell's testimony before the U.S. Congress is likely to shed some light on this. We see his performance as the most important event of this week – after the developments surrounding the Russian invasion of Ukraine, of course.
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:
- Financial services normally reserved for large multinationals
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