FX Update: War impacts mounting in FX. FX Update: War impacts mounting in FX. FX Update: War impacts mounting in FX.

FX Update: War impacts mounting in FX.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  Currencies outside of the Russian ruble have once again traded with muted volatility relative to the scale of the impact in other markets. But as the European session proceeds today, the impact seems to be mounting, as safe haven seeking in the USD and JPY predominates, while the negative reaction in the euro has Still, currencies are by no means the center of attention as we watch how the situation unfolds, particularly the shape of coming sanctions from Western powers.

FX Trading Focus: FX reacts to war in Ukraine

Russia shocked the world by moving against Ukraine in the air and on the ground, with a massive impact across markets, if less overwhelming in currencies. The Russian ruble cratered nearly 10% overnight, with the Russian central bank possibly defending the 90.00 level in USDRUB, with that exchange rate back below 84.00 as of this writing after the central bank promised emergency measures and intervention to shore up the ruble.

The US dollar and the Japanese yen are jockeying for safest haven status, with the greenback winning out as the day progresses in Europe. But the safest of all safe havens here is the hardest of currencies: gold. The euro has dropped well over a percent lower versus the USD as the cycle lows below 1.1150 are suddenly not that far away and will inevitably crumble if the fallout continues across markets – 1.1000 is the next focus area there. Other currencies are reacting along the lines of their traditional sensitivity to risk sentiment, if to a surprisingly muted degree. The Aussie has been particularly surprising in its relative resilience, as noted before, and it is noteworthy that oil-sensitive currencies are getting no support from developments as Brent Crude soars well above $100 as the focus is purely on liquidity and risk sentiment.

Things are very fluid right now and can certainly worsen further. China has declared that it understands Russia’s security concerns, from which we can infer that Russia will not find itself diplomatically isolated by major powers outside of the US and its more overt allies. As noted in this morning’s Saxo Market Call podcast, the most important next step for markets on top of the unfolding situation on the ground in Ukraine is the shape of the next round of Western sanctions against Russia and the degree to which these impact actual Russian commodities exports, as energy security has already proven a critical issue this winter in Europe on the slowing of Russian gas deliveries. The history of sanctions stretching back to the post-Crimea invasion in 2014 has been one of boxing Russia in and making life difficult for some, but has never really impacted the actual delivery of commodities to Russia’s trading partners. Deepening sanctions at this point, if they are to impress and have a real negative impact on Russian interests, will almost certainly mean a negative impact on the EU economy and global economies via inflation.

In any case, the situation has already delivered a fresh inflationary impulse in oil and food (Ukraine a significant wheat exporter and wheat prices are limit-up in US exchanges) and that will wear quickly on real GDP growth and limit the willingness or ability for central banks to tighten rates much as growth craters, even if inflation soars anew.

More in Steen Jakobsen’s latest Macro Digest.

Watching JPY crosses here as the JPY has generally trade weakly of late as investors have focused on Bank of Japan defending its yield-curve-control and the widening yield spreads against Japan’s favour punishing the JPY. As well, Japan is dependent on imported energy and other commodities, but on the other hand, investment flows often are the driver for significant moves in the JPY. If the  latest developments change the psychology for Japanese investors and their massive savings invested around the world, we could be in for a significant squeeze on JPY shorts on repatriation flows. This Ukraine situation has arrived, after all, with the JPY trading at all-time lows in real-effective, CPI adjusted terms. Meanwhile, the Ukraine situation and impact of sanctions risk impacting Europe more directly than any other major economic bloc, which is why we pair the JPY versus the Euro and watch the big range support below 127.50 in the likely event it comes into view.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
FX Trends becoming more pronounced with the latest moves, as the JPY and USD firm more, the euro and Scandies drop badly. Note the extreme strength in the precious metals here.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Hard to see how headlines can reverse the trend here – note GBPUSD flipping negative today, with AUDUSD and NZDUSD still in surprising uptrends (a USDCNH effect at work there?)

Source: Bloomberg and Saxo Group

Today’s Economic Calendar Highlights (all times GMT)

  • 1315 – UK BoE Governor Bailey to speak
  • 1330 – US Jan. Chicago Fed National Activity Index
  • 1330 – US Weekly Initial Jobless Claims
  • 1330 – US Q4 GDP Revision
  • 1400 – US Fed’s Barkin (non-voter) to speak
  • 1500 – US Jan. New Home Sales
  • 1530 – US Weekly Natural Gas Storage Change
  • 1600 – US Weekly DoE crude oil and product inventories
  • 1600 – US Feb. Kansas City Fed Manufacturing Index
  • 1600 – ECB’s Schnabel to speak
  • 1610 – US Fed’s Bostic (non-voter) to speak
  • 1700 – US Fed’s Mester (voter) to speak
  • 1800 – UK BoE Chief Economist Pill to speak
  • 1945 – New Zealand RBZN Governor Orr to speak
  • 0100 – US Fed’s Waller (voter) to speak


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