girls with signs on protest against russian war on ukraine

In our FX review this week, we talk through the sizeable shift in risk sentiment as the week progressed, and where we think the best options currently lie given the unpredictability of the current landscape.

Risk off dominates on Russia headlines

The early part of the week saw risk consolidate, but all eyes remained focused on the war in Ukraine. USD/RUB opened the week above the 100 barrier, and traded higher as the week went on. The pair also became more restricted to retail traders by providers. Either it was open only to close out existing positions, or shut off completely. 

The main reason for this was the lack of liquidity from market makers. Given the bulk of investors were looking to sell RUB, managing risk is almost impossible. Therefore, we decided to stay well away from considering any options here.

The back end of the week took a large turn, with confirmed reports of a fire on a nuclear power plant which the Russians were trying to occupy. The potential fall-out from a lack of containment here could have incredibly serious consequences. Not only are energy prices rocketing higher, but the commodity space in general is being impacted. Jesse wrote a great piece discussing this in more detail that can be read here.

In FX, this saw investors flock into the USD and CHF, along with selling EUR and GBP. EURUSD lost well over a percent on Friday, to close at 1.0929. Expected support at 1.11 and 1.10 were virtually non-existent. EURCHF also broke barriers on the low side, posting a low of 1.0021. GBPUSD stemmed some losses, but closed down 0.85% on the day.

Our thoughts going forward

From here, we feel that future direction will be dictated by news coming out from Eastern Europe. We prefer to be long USD as a short-term theme, but do note that the moves from Friday are pushing some pairs into oversold territory.

As for EUR, we were stopped out of our long EURCHF position, and are rethinking our view on the Eurozone. We think the large amount of imported energy will mean that the region will struggle to perform well for at least the rest of the year. We also think the ECB are now likely to forget any tightening of monetary policy actions for the foreseeable. Therefore, we are flipping to being bearish EUR.

In terms of relative value, we do like GBP still. We don’t think that the Bank of England will be overly put off from changing policy actions at the moment, and are still thinking the bank will raise interest rates again shortly. Given our above views, we like being long GBPEUR. Also, we think that oil is going to struggle to materially move higher, so also like being long GBPCAD at current levels.

Even with the above, we are mindful of how quickly things can change. Successful peace talks or a ceasefire would likely see a snap risk on mood, with potentially high USD losses seen. Therefore, we are cautious to take on any large long-term positions in the current environment.

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