‘T’Rouble for the Russian economy
This week has started where last week left off, with risk sentiment whipsawing as markets attempt to price in the latest developments in Ukraine. Convoys of Russian troops heading into Kyiv overnight put the prospect of immediate progress in the peace talks on the low side.
As the latest NATO sanctions bite, the price action yesterday was centred around the spectacular decline in the rouble and, to a lesser degree, the rally in oil (with a bit of BP volatility thrown in for good measure) as one might expect.
It was that decline in the rouble that really caught the eye, slipping roughly 30% at one point versus the dollar, and was enough to prompt the central bank to double Russian interest rates from 9.5% to 20% yesterday. Time will tell if the Russian central bank use—or indeed if they can still use— some of their USD 600b+ of non-rouble foreign exchange reserves to defend the currency. However, as Norman Lamont will tell you, intervention (without concerted help) often resembles someone attempting to run up a down escalator with flippers on. It rarely works in the long run.
Take the rouble out of the equation and recent outright currency movements amongst the majors have been remarkably sanguine. Quite remarkable, really. The pound started yesterday moving down to 1.3300 versus the greenback but bounced back over the 1.3400 region by close of play in the European session. With EUR/USD slipping back to 1.1200, GBP/EUR took the opportunity to move below 1.1976.
USD/CAD had an active session as oil rallied circa 5% on the session. The pair initially rallied on the Asian open (to 1.2800), but that jump in energy prices and an improving risk sentiment helped to drive CAD strength, and the USD bears took full control by the market close as the pair moved back under 1.2700.
The dollar index—an index of the USD measured against a basket of currencies (with a big weighting on EUR/USD)—reflected a much broader, if not bolder, USD decline. The JPY continues to benefit from safe-haven flows, but it is not rallying beyond reasonable daily gains, and that further reflects the ambiguous nature of currency moves just now. But, as we said yesterday, the war in Ukraine has the potential to muddy the water for central banks, and that in turn may be having a market impact on absolute currency movements. Better to wait and see, as they say.
No change from the RBA
The RBA kept the benchmark Australian interest rate unchanged during their latest meeting overnight. The ‘news’ was widely expected, and so AUD/USD was more positively impacted on the broader positive risk sentiment in markets this morning.
A look across the docket will tell you that we are due a relative plethora of economic readings over the course of the day. In the UK, the latest Manufacturing PMI Index is expected to come in somewhere around last month’s 57.3 print. In Europe, the latest inflation print may give the ECB further cause for concern, with an expected jump from 5.1% to 5.4% during February for the Eurozone as a whole. Watch for Germany’s print in particular. A big jump for Canadian GDP is expected, with a 6.2% (QoQ/Q4) estimate, up from 5.4%. In the U.S, the ISM Manufacturing PMI leads the pack, and a slight jump from 57.6 from 58 is due for last month.
The speaker’s corner will be occupied by both ECB head Lagarde and Joe Biden today.