In our FX review this week, we talk through the impact of the Russian invasion on Ukraine on key currency pairs, how this could shape the US Fed on rate hikes this year, and what the possible trading options are for the coming week.
Key developments from the week
Aside from the RUB, the early part of last week didn’t offer much volatility, despite it looking increasingly likely that Russia was indeed going to invade. USDRUB broke above 80 briefly on Tuesday, but other major USD crosses didn’t want to budge out of recent ranges. As we flagged up last week, both EURUSD and GBPUSD continued to exhibit unusually low movement as the week started.
This changed on Thursday, with the official invasion beginning. The key gainer in this case was USD, with the greenback posting gains across the board. Even against safe havens CHF and JPY, the dollar moved higher, as much as 1% intraday on Thursday.
Key losers were EUR and GBP. Somewhat understandably, the Euro was always going to lose out given the proximity of the fighting to the borders of the bloc. We felt that GBP was oversold during the day, and netted a profit on a tactical long when the pair broke below 1.3300 late in the day.
The commodity currencies lost ground, but not as much as one would normally expect in a risk-off day. This was due to the fact that oil was rallying strongly, with Brent Crude flying above the $100 per bbl level and WTI not far behind. These gains helped to offset the normal offload of the likes of AUD when risk sentiment sours.
The impact on rate hikes
As a result of the situation in Eastern Europe, we did see markets start to price out some of the hawkishness from the US Fed, Bank of England and others. This is logical, but we don’t think it materially changes the picture for rate hikes from developed nations this year.
We still expect the Fed to make the first move in March with a 50bps rate hike. We think the Bank of England will follow up with another 25bps hike in the early spring. Even last week, we saw the Kiwis raise rates by 25bps, showing that across the board we are experiencing tighter monetary policy.
What could derail this? If the economic impact from the war passes through materially to the UK then we could see the BoE stall hikes. But at best this will be a stall of a few months, rather than shifting to a dovish stance (in our opinion).
Last week our favored trades were long EURCHF and short GBPJPY. We also tactically went long GBPUSD on Thursday. Ahead this week, we see more upside for EURCHF, as well as eyeing up AUD longs as well. Ideally we want to steer clear of USD crosses, given the sensitivity to headline risk.