FX Update: The commodity angle versus the liquidity angle. FX Update: The commodity angle versus the liquidity angle. FX Update: The commodity angle versus the liquidity angle.

FX Update: The commodity angle versus the liquidity angle.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Commodity linked currencies have shown considerable resilience over the last few sessions as the impact of the Russian invasion of Ukraine is absorbed by commodity markets. Those currencies may continue to show resilience relative to prior cycles, but if we do suffer a new wave of proper deleveraging, the liquidity angle could yet trigger significant volatility in FX along traditional lines and support the traditional safe havens of the US dollar and Japanese yen.

FX Trading focus: The commodity angle versus the liquidity angle

The last couple of sessions have shown a remarkable resilience in some measures of risk sentiment, including the broader equity market and some normally pro-cyclical currencies – mostly those linked to commodities, although arguably it is the fundamental support of ripping commodities prices that is driving the latter more so than risk sentiment per se. To take a couple of examples, the AUD has absorbed recent events quite well as investors may be considering Australia’s impressive portfolio of commodities exports, which tick nearly all of the boxes for commodities exposed to the Russian invasion, including wheat (In 2019, Russia was the world’s top exporter, with Ukraine ranking fifth and Australia sixth) and LNG (Australia is world number one in LNG exports!). Elsewhere, the Norwegian krone is on fire and CAD is managing to find a bid on the fresh boost to energy prices today.

But let’s not fool ourselves – if the broad risk sentiment situation deteriorates badly again, for whatever reason, this attempt at nimbly picking winners due to the real-world impact of rising commodity prices could be quickly derailed by considerations of safe haven seeking. And in the case of a war and the knock-on risks in the financial system of sanctions, or a sudden seizure of Russian energy flows, the risk remains large of a sudden risk-off move out of the blue that could at least briefly spike volatility across asset classes. On Friday I looked at the irony we might see a more productive tone in risk sentiment this week if sanctions were not deeper than those announced – but the comprehensive sanctions announced at the weekend together with the speed with which a broad swath of companies are simply pulling out of Russia, suggests the risk of a significant firestorm through the global financial system.

So even if there are compelling arguments for an extension of many of the recent commodity currency moves, traders need to consider hedging positions (and we even have to consider the risk-positive scenario effect in FX in which a sudden détente in Ukraine leads to a collapse in energy prices, especially for Europe). There are a few signs of systemic risks picking up in the financial system, as we discussed in this morning’s Saxo Market Call podcast, including counterparty risk in the US banking system (Citigroup today out indicating a $10 billion exposure to Russia). As well, we have the strong bid all along the curve in US treasuries and even for German bunds, where the yield is negative today after trading as high as +21 basis points yesterday, which suggests safe haven seeking. Corporate bond issuance, particularly for junk has been disrupted for nearly a month as spreads widen and market conditions deteriorate. Yes, we have seen some remarkable resilience this week and we can safely assume that central banks know the drill for preventing any real systemic event, but accidents can still happen here.

And the current backdrop can’t come at a more awkward time for the US Fed, which is navigating tremendous pressure to do something about inflation from the White House and is gearing up for rate lift-off at the March 16 FOMC meeting when an aggravated counterparty risk situation in the global banking system could be working its way through the system on a bonfire of Russian-held assets that may require targeted easing measures. Will be watching Fed Chair Powell’s comfort levels – or lack thereof – in testimony before Congress tomorrow and Thursday. That testimony comes in the wake of tonight’s State of the Union address from US President Biden, who is under siege from every direction and suffering the worst approval ratings of his presidency.

As we have noted recently, the AUDUSD continues to bounce back like a rubber ball after every risk-off inspire sell-off as traders and investors are likely focused on Australia’s strong portfolio of commodities exports (more above). As well, the long cautious RBA is less of a drag now that central rate expectations have eased off elsewhere – particularly in the US this week. Overnight, the RBA waxed dovish once again, specifically citing Ukraine as a new risk to the forward outlook and clearly indicating the bank is in no hurry to begin its rate tightening cycle. The technical situation looks promising, if still needing a solid close above 0.7300 to suggest an upside break, and as we noted, headline risk triggering significant market volatility could derail the bullish hopes, as could, ironically, a sudden détente in Ukraine (please!) that leads to a collapse in European energy prices.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
Non-commodity euro-centric FX is suffering the most, it is clear to see here – have to imagine this I soon about as extended as it can get as a further explosion in commodity prices will eventually eat into the growth outlook as it pulls the weight normally done by central bank tightening.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note the extreme levels in some of the commodity FX/European currency trends north of 6 – the ability for these to extend is likely constrained beyond the very nearest term.

Source: Bloomberg and Saxo Group

Today’s Economic Calendar Highlights (all times GMT)

  • 1330 – Canada Dec. GDP
  • 1500 – US Feb. ISM Manufacturing
  • 1830 – UK Bank of England’s Saunders to speak
  • 1900 – Uk Bank of England’s Mann to speak
  • 1900 – US Fed’s Bostic (Non-voter) to speak
  • 1900 – US Fed’s Mester (voter) to speak
  • 0030 – Australia Q4 GDP
  • 0200 – US President Biden State of the Union address

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

Contact Saxo

Select region


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.