Post date: 07/03/2022 12:38

European currencies sink, dollar soars as the news from Ukraine get grimmer.

The worsening humanitarian and security crisis brought about by the Russian invasion of Ukraine continues to buffet financial markets. There are volatile moves and a flight to safe havens everywhere, but European assets are being punished with particular severity, due to both geography and the continent’s vulnerability to energy supply disruptions. The euro and the Swedish kroner were the worst performing currencies in G10, down approximately 3% and nearly 5% respectively. At the top of the rankings, we are not seeing the traditional safe havens, like the Japanese yen and the Swiss franc. Instead, soaring commodity prices worldwide have rewarded the currencies of commodity-exporting countries far from the war, such as the Australian and New Zealand dollars, the Colombian peso, and the Brazilian real, in a stark departure from previous bouts of risk aversion. On the other extreme, aside from the ruble, we are unsurprisingly seeing sharp moves downward of most Eastern European currencies, led by the Hungarian forint and the Polish zloty. Predicting the outcome for this week’s ECB meeting Thursday is more difficult than ever, as the central bank is faced with a massive stagflationary risk on top of pre-existing burgeoning price pressures. US February inflation data is also released on Thursday, which should make for a very volatile trading day in the EUR/USD currency pair. Obviously, the main focus for financial markets in general will remain the headlines out of the Russian invasion, with particular attention being paid to any sign of a ceasefire that could send risk assets temporarily higher.


The Bank of England has so far refrained from making any significant dovish signs in reaction to the Russian invasion. In fact, two speakers last week failed to suggest that any dovish pivot was in the cards for the institution. This enabled sterling to perform relatively well last week, somewhere in between the US dollar and the euro and outperform nearly all of its European peers. This week there is almost no data of note on tap, so the pound will take its clues from events and releases elsewhere. However, we see the potential for a continued rally against the euro, based on both relative hawkishness of central banks and lower UK dependence on energy imports compared to the Eurozone.


The inflation report for February was of course completely overshadowed by the terrible news from Ukraine, but it still deserves mention. It was yet another upward surprise, showing strength both in the headline number and the core one, confirming that price pressures were already becoming widespread even before the stagflationary shock of the war. The ECB reaction is expected to be dovish, delaying the removal of accommodation that we had previously expected this week. However, any such delay will have to be more than compensated with additional tightening later on, if the ECB is serious about keeping inflation expectations in the Eurozone well anchored. For now, it does seem the path of least resistance for the common currency is down.


The payroll report out of the US also failed to have the impact it would have had in normal conditions, but nevertheless, it confirmed the booming state of the US job market. Strong job creation came hand in hand with surprisingly mild wage pressures, though we would hold judgement till next month given the high volatility that these numbers have presented on a month-on-month basis. Chair Powell’s testimony to Congress was relatively sanguine about the war impact on the US economy, which is self-sufficient in energy terms and relatively isolated from the conflict. Powell made it clear that the rate-hiking process has not been derailed and the first 25 bp are coming in March. The contrast with the ECB’s apparent dovishness is stark and explains the tumble we saw in the EUR/USD exchange rate.