In our FX review this week, we discuss the latest US Fed meeting, the spillover impact from the situation with Russia and the West, and the contagion impact of the continued move lower in equity markets.

The Fed are still hawkish

The main event from last week was the US Fed meeting. We previewed several things to watch out for on Wednesday. In short, we pondered whether the Fed would look to walk back on some of the hawkish language regarding policy given the equity selloff. In fact, as we went into the meeting, the NASDAQ recorded the worst ever January performance, eclipsing the 9.9% loss from 2008. Clearly, the month isn’t over so we’ll hold back further judgments. Yet we thought that the Fed might be reluctant to end the tapering process any quicker than had already been discussed in Q4.

This turned out to be correct, with the Fed sticking to the plan as it currently stands of ending asset purchases in March, from which it will then look to hike rates. However, we did see USD strength in the aftermath, as the equity selloff doesn’t seem to be slowing down the central bank at all. With the broad outlook positive, and the removal of ‘transitory’ before inflation, the US look set to raise rates 3-5 times this year.

It pushed EURUSD down to fresh 12 month lows as the pair broke below 1.1200, and at one point looked to have a run at 1.1100 on Friday. Despite some safe haven flows, we also saw USDCHF and USDJPY retrace higher. As for GBPUSD, the pair struggled for direction, closing the week just below 1.3400.

Tensions in the east hurt RUB

The other points worth noting from last week was the heightening of tensions for a possible invasion of Ukraine from Russia. The Ruble sold off and broke above 80 versus USD on Wednesday. Even with the central bank reducing purchases (something that should support RUB), it wasn’t enough to prevent the slide. 

Given the large bid/offer spreads and liquidity, we think it’s a very high risk play to get involved from a spot perspective. We’d prefer to play this via options, and think there is good value in being long straddles with short tenors. This takes the risk out of having to make a directional decision on where the RUB will trade. For those with a high conviction either way, spot can offer lucrative returns, but not without high risk.

Eyes on the BoE next week

As we go into next week, there are a few things worth noting. On Friday, we saw a bid into close on US equities, which could bode well for the coming week. FX pairs haven’t moved significantly on this story over the past couple of weeks, so we don’t forecast any major reaction even if equities are in the green.

On Thursday we have the Bank of England meeting, where we think the bank will hike rates by 0.25%. We think that this is broadly expected by the market, but would consider a small long position regardless.

Leave a Reply