Geopolitical developments continued to dominate market sentiment this week, with volatility and risk-off sentiment picking up quickly after Russia began its attack on Ukraine.
Surprisingly, risk-on vibes came back quickly after Russian sanctions were announced, making the Kiwi and Aussie dollars the big winners into the weekend.
Notable News & Economic Updates:
The Reserve Bank of New Zealand hiked interest rates from 0.75% to 1.00% as expected on Wednesday
Russia invaded Ukraine this week on many fronts, sending in airstrikes, troops and tanks. Cyber attacks on Ukrainian government websites and banks were also reported.
Russian stocks crash 33% on Thursday and ruble plunged to a record low of 89.60 rubles per dollar.
Various countries announced plans to impose sanctions on Russian officials, including Russian President Putin and Foreign Minister Lavrov in protest to the invasion. Russian banks have also been restricted in activity from Western markets.
Chinese state media said that Putin and President Xi Jinping spoke on Friday and Putin agreed to open negotiations to end hostilities
Intermarket Weekly Recap
The Russia-Ukraine standoff was once again the main focus this week, and markets were relatively calm early on, although we can see a net risk-off flow on the intermarket chart above. Traders were likely de-risking and waiting to see if diplomacy would come out on top, or if Russia’s military would eventually make its move into Ukraine.
It wasn’t until Thursday that markets really got moving as the order to move was given and Russia began its full scale invasion of Ukraine. Risk assets–mainly equities, crypto and bond yields–dove on the news; while oil, gold and the U.S. dollar moved higher into the Thursday Asia and London trading sessions.
It was during the Thursday U.S. session where we saw an unbelievable turn around in risk sentiment, reversing the earlier risk-off moves. The general argument seems to be that when we got news of the kind of sanctions that were being proposed on Russia, the market saw it as much softer than feared. Remember that Russia is a major commodity exporter, so a complete cutoff from the global financial system would likely be hurtful for many at some level, and/or spark an aggressive response from Russia.
The bullish move in risk sentiment may arguably be also on the idea that a war in Ukraine and sanctions on Russia would cause global economic disruptions, likely tempering expectations of an aggressive tightening regime from the Federal Reserve to tame high prices. Before the invasion, there was expectations for as 50 bps hike in March; that may be off the table now depending on how this situation develops.
One final argument may be that risk-off sentiment was too extreme and/or we’re seeing a buy-the-rumor, sell-the-news scenario in the works as shorts take off profits ahead of the weekend. Whatever the case may be, risk-on was the move into the weekend despite the dire geopolitical situation at hand, benefiting this week’s currency winners, the New Zealand dollar and Australian dollar.
USD Pairs
Fed Bowman suggested 50 bps increase in March on Monday
U.S. business activity accelerates in February to 56.0 from 51.1 in January
U.S. mortgage applications dropped as mortgage rates rise to an average of 4.06%
Federal Reserve Bank of Richmond President Barkin says ‘time will tell’ if Ukraine changes rate outlook
Core PCE Price Index (the Fed’s preferred inflation gauge): +5.2% y/y in January; the biggest rise since 1983
University of Michigan U.S. consumer sentiment fell to 61.7 in February vs. 67.2 in January; lowest since Oct. 2011
Fed Monetary Policy Report says wages and labor may drive persistent inflation
U.S. Pending home sales fell 5.7% in January due to shortage of inventory
U.S. Durable Goods Orders: 1.6% In January vs. 1.2% in December
GBP Pairs
U.K. Prime Minister Boris Johnson lifted all remaining Covid restrictions in England on Monday
The IHS Markit/CIPS UK Manufacturing PMI hit a four-month low at 57.3 in February of 2022
U.K. public sector borrowing hits a £2.9B surplus in January
Bank of England policy maker Silvana Tenreyro suggested only a “small amount of policy tightening” is needed on Wednesday
Bank of England Governor Bailey asked firms to show restraint when raising prices
Bank of England Chief Economist Huw Pill vowed to combat U.K. inflation in a ‘measured way’ on Thursday
EUR Pairs
German producer prices rose 2.2% vs. projected 1.6% gain
German Ifo surged to 98.9 in February vs. 96.0 in January
French flash services PMI: 53.1 to 57.9 vs. 54.0 forecast; French flash manufacturing PMI up from 55.5 to 57.6 vs. 55.5 forecast
German flash manufacturing PMI fell from 59.8 to 58.5 in January; German flash services PMI up from 52.2 to 56.6
German GfK consumer climate index fell from -6.7 to -8.1 vs. -6.2 forecast
ECB official Holzmann suggests raising rates before ending bond purchases
Slovenian central bank chief Bostjan Vasle says ECB has space to gradually normalize policy
ECB officials signal that the situation in Ukraine may delay but not derail an exit from stimulus
Germany GDP in 2021 grew by 2.9% year-on-year
CHF Pairs
Overlay of CHF Pairs: 1-Hour Forex ChartOverlay of CHF Pairs: 1-Hour Forex Chart
European parliament demanded that the EU should assess Switzerland, to determined if it should be categorized as a high-risk country for money laundering and financial crime
CAD Pairs
Monthly Survey of Canadian Manufacturing: Flash estimate for January 2022: manufacturing sales rose 1.3%
Canadian Survey on Business Conditions for Q1 2022: Employment fell 200K in January & unemployment rate rose 0.5% to 6.5%
NZD Pairs
Prime Minister Jacinda Ardern says on Monday that New Zealand will lift Covid restrictions only when ‘well beyond’ peak
RBNZ hiked interest rates from 0.75% to 1.00% as expected; there was debate between RBNZ members between a 0.25% and 0.50% hike
RBNZ Governor Orr said that countering inflation early will prevent the need for higher rates in the future
New Zealand trade balance: NZD1.082B deficit in January
New Zealand retail sales volumes rose 8.6% in Q4 2021 vs. -8.1% in Q3 2021
AUD Pairs
Australia Services PMI jumped to 56.4 in February vs. 46.6 in January, an 8-month high
Australian construction work done sank 0.4% vs. projected 2.6% gain
Annual wage growth increases to 2.3% y/y in December – Australian Bureau of Statistics
JPY Pairs
Japanese flash manufacturing PMI down from 55.4 to 52.9
Japan PPI Services rise by 1.2% y/y in January
Tokyo Core CPI rose by 0.5% in February vs. 0.4% forecast and 0.2% in January
