FX FX FX

FX Update: Euro and its periphery continue to suffer worst of Ukraine impact

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The euro continues to weaken on the ongoing fallout from the war in Ukraine as European equity markets are capitulating today. Peripheral European FX, from the Swedish krona to the CEE currencies, continues to trade even weaker, with even a larger than expected rate hike unable to support the Hungarian forint. And this is Friday, with every weekend seeming a long one.


FX Trading focus: Euro and its periphery continue to get worst of it from war in Ukraine.

European equity markets are capitulating today on the weight of the implications of the war in Ukraine and its ongoing fallout, and the euro itself is capitulation as well, with EURUSD trading sub-1.1000 and EURCHF well on its way to parity, while EURJPY. As I note below, EURAUD has been a theme trade on the fallout from Russia’s assault on Ukraine as Australia is strong in the very commodities that are most heavily impacted by the conflict: it is a top six wheat exporter and the world’s largest exporter of LNG.

An extra twist for CEE from the war in Ukraine is flagged by a Bloomberg article that discusses Ukrainian workers “downing tools and ditching trucks” to head back to Ukraine to fight the Russian assault, with significant implications for these economies, where wage growth has continued to outstrip even the high recent inflation levels. A real growth recession is coming there and CEE currencies are under considerable pressure. Before the pandemic, between 2.2 and 2.7 million Ukrainian migrant workers were working abroad – many of them in Poland. Yesterday, the Hungarian central bank hiked the deposit rate 75 basis points to 5.35% and the market hardly blinked an eye.  The National Bank of Poland bank meets next week and is expected to hike the rate 50 basis points to 3.25%, but will need to do more to slow the zloty’s slide if the war impact continues to deepen. EURCZK is possibly the first place to look to take risk in fading this move, as Czech has gigantic foreign reserves it was already out announcing this morning that it had mobilized to stabilize the koruna and EURCZK shorts offer solid 500 basis points of carry that will likely increase further with further Czech central bank policy tightening.

Sterling has been firmer in part on the very weak euro, but possibly also on the idea that security concerns for EU countries will motivate EU countries and fellow NATO members to maintain a strong defensive front against Russia, as the UK has the strongest military presence in Europe. No incentive, in other words, to draw up new battle lines, etc. on customs issues linked to Norther Ireland, etc.

The US February ISM Services Index release yesterday dropped sharply to 56.5 versus 61.1 expected and 59.9 in January. The fall-off from the record levels registered a few months ago is impressive, but as this is a “diffusion” index, it is impossible for conditions to maintain a strong pace of relative improvement over time. 56.5 is still a solid number, even if the deceleration is notable. The employment sub-index fell to 48.5 versus 52.3 in January and was the worst since August of 2020. As an acceleration in gas prices and food prices has been set in motion only starting in the very last days of February, the impact of rising inflation on confidence and economic activity will deserve close scrutiny for the March data cycle – higher energy prices have preceded every recession in modern US economic history. Wheat prices are particularly scary, as we are near record levels and Chicago wheat futures have been pinned at limit up overnight – food demand is not particularly elastic.

Today is US Nonfarm payrolls data, with possibly more focus on the Average Hourly Earnings as an input for the persistence of inflation. Next week’s US February CPI print is expected at 7.9% and that is before the latest acceleration in key commodity inputs.

Chart: EURAUD
The EURAUD pair has been about as direct an expression of the fallout from the war in Ukraine as any other G10 pairing, if one is not thinking along the usual “risk sentiment” fault-line, as with EURCHF, etc. . As noted above, Australia’s impressive portfolio of commodities exports include those most under pressure directly from the war, but also from the sanctions on Russia, as metals prices have also shot higher in recent sessions. Of course, this also builds energy for an incredible reversal in the hopeful event we see a change of the situation on the ground in Ukraine.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Trends continue to deepen, with the euro and the Swedish krona getting the worst of it among G10 currencies, while JPY is edging out the US dollar today as a safe haven on falling long treasury yields. The Aussie is trading as a commodity super-power.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Little new in the individual pairs of late as trends are mostly deepening – look at AUDSEK registering an incredible 14.1 reading. Interesting to watch a pair like USDCAD which struggles between oil prices supporting CAD while risk sentiment is normally more CAD-negative, which is the side winning out today – at some level of broad deleveraging, I would expect this to hit AUD and NZD as well.

Source: Bloomberg and Saxo Group

Today’s Economic Calendar Highlights (all times GMT)

  • 1330 – US Feb. Change in Nonfarm payrolls
  • 1330 – US Feb. Unemployment Rate
  • 1330 – US Feb. Average Hourly Earnings
  • 1500 – Canada Feb. Ivey PMI
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.