FX Trading Focus: Market snap back impresses after Russian escalation
Russian president Putin took the “logical” next step in escalating the situation with Ukraine as he moved to recognize the two breakaway regions of eastern Ukraine and moved in Russian troops, a move the Ukrainian president Zelenskiy said was simply recognizing that forces within the region were Russian regulars all along. The reaction across markets was swift if not impressively deep, particularly in FX, and the subsequent snap-back suggests that the market wants to believe that we have at least reached a temporary peak in tensions. There may some near-term hope that as long as Russia stops short of any fresh provocation for now, the current move, while unacceptable to Western powers, was mostly a crystallization of the on-the-ground reality and not much more. And the UK today may in turn have signaled the coming approach on sanctions: make a bit of noise, but not doing anything overwhelming in the initial response, holding further sanctions in reserve only for rolling out on further Russian escalation in Ukraine.
Putin has been out today saying that he is not planning to restore the Russian empire borders, and that he supports the sovereignty of former Soviet Republics, but did precede the moves late yesterday with a long and pointed speech in which he suggested that the Ukraine is an artificial construct and that the US and NATO have made the country a “theater of war”. German Chancellor Scholz “halted” the approval process for the Nord Stream 2 pipeline, something I think most had the impression had been halted months ago. Russian representatives claim that diplomatic channels are still open, Ukraine’s president Zelenskiy calls for sanctions but said that “wide escalation” won’t happen. Russian foreign minister Lavrov chimed in at one point earlier this morning that Ukraine doesn’t have a right to sovereignty, while shortly before this report went live, the US was said to be discussing whether a Lavrov meeting with US Secretary of State Blinken might go forward.
What about the market reaction? The FX response to the above was modest outside of the recent usual suspects like EURCHF falling sharply, and the recovery, especially in EURCHF, which is clearly the most directly related currency pair to the situation, has been very smart and swift, one that suggests the market may be able to live with the status quo as long as the escalation stops from here after not-too-disruption sanctions (we should know more by the end of the day as sanctions are being debated today in Europe and US sources indicate the Biden administration will announce something later today.). Elsewhere, the USDRUB spike has faded sharply, oil prices have backed off about half of their gains on the day, and the AUDUSD remains surprisingly resilient, as discussed below.
Let’s not forget the Fed: with oil prices ratcheting higher still, let’s not forget the schedule of incoming event risks I enumerated in yesterday’s update (starting with this Friday’s Jan. PCE inflation data) that are critical ahead of the pivotal March 16 FOMC meeting. Michelle Bowman of the Fed Board of Governors was out yesterday voicing support for a rate hike at the March FOMC meeting and wants to keep the 50-basis point option in play. “I, as all of my colleagues will as well, will be watching the data closely to judge the appropriate size of an increase at the March meeting.” Very interesting to see these words, which she also associates with her FOMC colleagues. This helped boost US yields at the front end of the yield curve.
RBNZ on tap tonight: they are expected to hike 25 basis points to bring the rate to 1.00%. The most recent tendency has been a more measured tone on further tightening relative to the early and aggressive liftoff last year from Orr and company. This is the first DM central bank that is up and providing guidance amidst a significantly more wobbly backdrop of sentiment. Given the latest tame wage data and housing market activity normalizing rapidly, not seeing any reason for a change of approach. New Zealand imports well over 50% of its primary energy, but does have significant power generation from hydro and geothermal.
The AUDUSD pair continues to fail to push lower despite a rather harrowing backdrop of weak risk sentiment that hasn’t weighed at all on the Aussie of late, nor particularly heavily on Australian equities in recent sessions. This Aussie performance commands respect, but to really make the point, the pair needs to engineer a daily close above 0.7250 and work through the next layers of resistance just above 0.7300 to set the sights back toward 0.7500+