The world is shocked as Russia launches a major military offensive against Ukraine. Financial markets are predictably witnessing a flight to safety and may have to price in slower growth on the further spike in energy prices. In FX, European currencies will remain under pressure and the dollar should continue to be favored.
News early this morning that Russia has launched a major military offensive across Ukraine has shocked the world. As we discussed in our market review yesterday, FX markets had shifted to a benign interpretation of events – perhaps that the Russian incursion would stop purely in the rebel-held areas. That thesis has been blown away by developments overnight and FX traded volatility prices have understandably jumped.
A key focus for today will be the Western response to Russia’s aggression. In the US, watch carefully for the progress of the Menendez Bill in Congress. This has been dubbed the ‘mother of all sanctions bills’ and given events overnight it seems its progress is highly likely. The question will then be which Russian financial institutions are targeted for severe financial sanctions. Russia has closed local markets today, but USD/RUB has traded to 90.
Given the uncertainty, expect FX markets to trade along the lines we discussed in yesterday’s report. Namely, those geographically closest to the crisis and exposed to the imported energy story – CE3 currencies in particular – to stay under pressure. The Czech koruna and Hungarian forint have already fallen 1-1.5% today. The Swedish krona also looks exposed – a dovish central bank and a small open economy exposed to what will be lower European growth prospects.
While the Federal Reserve tightening cycle may be re-priced lower, we would still favor the dollar to outperform Europe right now. Trade and energy links to Russia are tiny compared to Europe. And dollar liquidity will be in demand at very uncertain times like this. As discussed yesterday, we still like DXY (heavily weighted against European currencies) rising to 97.00.
The Russian central bank increased daily dollars offered via foreign exchange swap operations with banks to $5 billion from $3 billion, it said on Thursday, as Moscow ordered forces to invade Ukraine.
A senior U.S. administration official told reporters on Tuesday that Sberbank and No. 2 lender VTB would face U.S. sanctions if Moscow proceeded with its invasion of Ukraine, warning that no Russian financial institutions were safe.
USD/RUB Long (Buy)
Enter at: 87.9747