FX Update: Markets gyrating after latest geopolitical escalation. FX Update: Markets gyrating after latest geopolitical escalation. FX Update: Markets gyrating after latest geopolitical escalation.

FX Update: Markets gyrating after latest geopolitical escalation.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  Russian President has moved to recognize the self-proclaimed republics in eastern Ukraine and therewith looks to have crossed the Rubicon in terms of any near-term diplomacy with Western powers on its posturing on Ukraine. Markets are trying for a speedy recovery after the initial impact, suggesting a strong desire to believe there will be no further escalation for now. The next test for that notion will be the shape and severity of Western sanctions and the Russian response.

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+

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The usual suspects are mean reverting after the typical response to “risk off” with JPY and CHF especially weakening, while the Aussie and Scandies scramble to recover after spiking to the weak side. If the snap-back move holds into tomorrow, risk sentiment could be set to stabilize for a while longer, if not able to escape headline risks if anything escalates further in Ukraine. Eventually, the focus for sentiment will quickly shift over to the Fed as the March 16 FOMC approaches.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
It will be easy for a number of USD pairs to flip into bearish USD mode if sentiment continues to improve for another couple of sessions. The biggest of these would be EURUSD, which looks more technically constructive on a strong close today and above 1.1400, with a proper break and close above 1.1450 a proper breakout signal (something directional sure lies ahead in coming weeks in the run-up to and in the wake of the ECB and FOMC meetings).

Source: Bloomberg and Saxo Group

Today’s Economic Calendar Highlights (all times GMT)

  • 1400 – US Dec. S&P CoreLogic House Price Index
  • 1445 – US Feb. Preliminary Markit Manufacturing & Services PMI
  • 1500 – US Feb. Conference Board Consumer Confidence
  • 1500 – US Feb. Richmond Fed Manufacturing Survey
  • 2030 – US Fed’s Bostic (non-Voter) to speak
  • 0030 – Australia Q4 Wage Price Index
  • 0100 – RBNZ Official Cash Rate
  • 0200 – RBNZ Governor Orr press conference after rate decision

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo 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 or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

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. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

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

The information or the products and services referred to on this site 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 are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

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