In the FX review this week, we talk through the retracement of USDRUB back to pre-war levels, why GBPUSD isn’t moving and what could be next for USDJPY.
A stronger Russian Ruble?
USDRUB closed the week just under 84, marking a significant reduction in just a few weeks from when it hit highs above 150. Despite this high volatility, many retail players were unable to get involved in this move given the reluctance of providers to provide liquidity and trading access.
The big question is why are we seeing RUB strength given the invasion is still ongoing, with sanctions in place? From our point of view, we see a few factors in play. Firstly, the Government banned moving funds out of the country, meaning that locals weren’t selling RUB to buy USD. Secondly, bond coupons and other payouts linked to financial instruments have been paid in RUB, not USD. Finally, due to the sanctions, it means that imports to the country are very limited. Given that to import something you need to purchase the foreign currency, the lack of imports has removed a lot of RUB selling.
Fundamentally, we think the negative impact on the Russian economy could be large going forward. Therefore, if we could access USDRUB, we would prefer to short RUB.
GBPUSD volatility drops off the cliff
Another topic on traders minds this week has been the lack of volatility on GBPUSD. It traded in almost a 100 pip range around 1.3150-1.3050 for the week, with a lack of desire to move beyond that.
The market currently is pricing in future rate hikes for both the UK and US, which means there’s little divergence in rate projections. Further, both countries are seeing high inflation, as well as taking a hit from Russian sanctions. Therefore, there isn’t too much to differentiate either economy right now.
On that basis, we see limited scope to trade the pair right now. A break below 1.3000 would open up downside, whereas taking out 1.3300 would open the door 1.3600.
Whippy Japanese Yen
Finally, USDJPY continues to frustrate investors, with whipsaw price action. We were stopped out of our short position in the 123’s, and the pair traded as high as 125 before retracing lower. Yet those who were eyeing up a deeper below below 121 were disappointed, as on Friday we saw a sharp bounce back up to 123.
With the BoJ being dovish in their rhetoric, the divergence with the US monetary policy is becoming very clear. Add into the mix the higher commodity prices that Japan have to import, and JPY does seem vulnerable in the medium term. In the short run we still think this moves back to 120, given the overbought technicals. However, we don’t have enough confidence in this conviction to re-enter in the coming week.