FX Update: Geopolitics suddenly the most important overlay. FX Update: Geopolitics suddenly the most important overlay. FX Update: Geopolitics suddenly the most important overlay.

FX Update: Geopolitics suddenly the most important overlay.

John Hardy

Head of FX Strategy

Summary:  There are plenty of stories and subplots to track this week, from the RBNZ on Wednesday to the Bank of Japan handover process and Sweden’s CPI shocker this morning, but overlaying everything is the risk of a dramatic geopolitical escalation after US Secretary of State Blinken warned China on providing lethal aid to Russia, which risks drowning out all else depending on how the touchy situation develops from here.

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FX Trading focus: Geopolitical focus dominates, but subplots this week to include BoJ nominee appearance, today’s CPI shocker from Sweden and Wednesday’s possible no-hike from the RBNZ.

Not long after the US dollar was breaking free of resistance on Friday, US yields turned tail back lower ahead of the three-day weekend (US Presidents’ Day means markets closed in the US today), taking the US dollar down and arguably engineering a bearish USD reversal, if a so-far shallow one. Since then, we have new geopolitical developments that represent an entirely new level of risk to the global economy and markets after US Secretary of State Antony Blinken at the Munich Security Conference at the weekend warned China against providing any lethal military aid to Russia in its war on Ukraine. He claimed as well that the US has evidence that China is considering advancing such aid, and warned of “serious consequences” if it did so. China has yet to respond specifically to this allegation and markets are surprisingly complacent given what has just taken place.

Today, US President Biden touched down in Kyiv, Ukraine and strolled the streets there with Ukrainian president Zelenskyj in a dramatic show of support after Blinken’s rhetoric and after VP Harris late last week charged Russia with crimes against humanity. The implications are stark and if China makes an overt move toward supporting Russia’s military with lethal aid, the turn in sentiment would likely drown out all else as the market ponders the scale and speed of the de-globalization narrative and disruptions to global supply chains and trade networks on the inevitably harsh US sanctions. The immediate “winner” in the scenario might be the US dollar on the negative implications for sentiment, but possibly also the Japanese yen if investors rush to cash and to short-dated treasuries. The euro could also struggle (heavy exposure via trade, concerns on the Ukraine war effort on European security) against the Swiss franc, while risk-sensitive currencies might perform relative to risk itself, of course, but also relative to trade exposure to China (presuming AUD would be a significant under-performer on that account). Of course, there is a significant gray area between overt Chinese military support for Russia and the likely defiant rhetoric from China that it will make its own decisions on any matter. But needless to say, the coming days and weeks can transpire rather quietly on this front or can result in an event of historical proportions, and the probabilities of the one or the other scenario are impossible to calculate. Forewarned is forearmed as the saying goes.

USDJPY reversed back lower Friday after testing above 135.00 in line with the reversal of the rise in US treasury yields. The JPY should remain one of the most sensitive currencies to the direction in US yields, but also to the direction of BoJ policy, first on whether outgoing Governor Kuroda will want to make any waves in his final BoJ meeting as Governor on March 10, but also as the market awaits for the style and substance to come from the nominee to replace Kuroda after his exit in early April, Kazuo Ueda. The latter will speak before Japan’s Lower House on Friday. The recent 127.23 low was within a few pips of the 50% correction of the enormous surge off the early 2021 lows of 102.59 to the 151.95 top. Given the current US yield levels of 4.50% and higher for the US 2-year and nearly 4.00% recently for the 10-year, some measure of BoJ “normalization” is already in the price, but we have to remember that a significant Fed easing cycle for 2024 is already in the price as well, on the presumption that either a recession or a hefty disinflation is in the cards. The next six to eight weeks are critical for the JPY as the market gets a feeling for Ueda’s style and any new signals, while Kuroda has a chance to make a splash on March 10 and is set to leave on April 6, just after the end of the Japanese financial year on March 31. Tactically, the upside level of note is perhaps the 200-day moving average just shy of 137.00 currently, while the downside pivot zone is between 132.50 and 130.00 – awaiting signals from the drift in global yields and the policy signals from the BoJ.

Source: Saxo Group

The odds of an RBNZ rate hike are falling fast this Wednesday as the disastrous floods there would make a rate hike in times of stress play very badly PR-wise. While AUDNZD seems to be absorbing this with a significant new rally extension above the 200-day moving average and the 1.1000 level, NZ 2-year yields traded higher overnight, though terminal rate expectations for the RBNZ are about 15 basis points lower than the peak of several trading sessions ago. It makes sense for the RBNZ to skip hiking this week, but the guidance may not shift much, and while the FX market seems to be pricing in higher odds of the RBNZ pausing here, money market indicators still suggest the market is looking for even odds of either 25 or 50 basis points. Watch out for volatility over the RBNZ on Wednesday (0200 for us here in CET time zone).

Sweden reported very hot core January CPI numbers this morning at +0.4% MoM and +8.7% YoY vs. -0.2%/+8.2% expected and 8.4% in December, so an acceleration rather than the expected deceleration. SEK is surging on the anticipation that the Riksbank will have to continue firming its message on tightening policy. EURSEK hit new lows for the year today and could be on its way to a test of the 200-day moving average, below 10.85 currently, although SEK could be vulnerable in a large-scale risk-off scenario (geopolitics noted above, etc…)

Table: FX Board of G10 and CNH trend evolution and strength.
SEK is resurgent after today’s Sweden’s hot January CPI numbers, and the US dollar has merely had its upward momentum tames – watching for further status there in coming days. The NZD has lost considerable altitude recently as expectations for this week’s RBNZ meeting deflate as noted above.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Watching JPY- and USD-pair status this week closely.  The EURSEK downtrend was saved by today’s Swedish CPI data.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • US Markets Close for Holiday
  • 1500 – Eurozone Feb. Preliminary Consumer Confidence
  • 1900 – UK Bank of England’s Woods to speak
  • 0030 – Australia RBA Meeting Minutes

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