News & Analysis


The pound remains pressured through the risk-off theme in markets this morning, but its losses are nowhere near the euro’s losses with the pound being less sensitive to financial developments in Eastern Europe. While global headlines are going to continue to dominate FX markets this week, the Bank of England’s reaction to this will be key for the pound in the days ahead with fears around stagflation arising. On Tuesday, BoE’s Saunders and Mann speak at 18:30 and 19:00 GMT respectively, followed by Tenreyo and Cunliffe on Wednesday at 18:30 and 20:00.


The euro was hit hard by the geopolitical developments over the weekend as its regional proximity and procyclical features leave the currency vulnerable to the situation in Eastern Europe. Germany’s government made a drastic turnaround on its foreign policy after Chancellor Olaf Scholz’ speech yesterday where he reversed the past many years of SPD policies along with Germany’s defence politics. Scholz told parliament that Germany would spend an additional €100bn (2-3% of GDP) on defence this year, and spend at least another 2% of GDP on defence per year from 2024. On top of this, he declared an end to the energy dependence where renewed focus will be on LNG and green energy. The increased spending may open a larger discussion this year around looser fiscal policy both from Germany and other euro area governments at upcoming budget releases. Elsewhere in Europe, focus remains on the weekly sight deposits of the Swiss National Bank as the Swiss franc’s rally following the deterioration in risk sentiment was milder than some had expected.  Last week’s sight deposits, which are released this afternoon, could show a large jump if the SNB has been intervening in FX markets and selling francs to prevent the currency from strengthening excessively. Should today’s print however be little changed, then that may serve as an invitation for traders to push EURCHF below the 1.03 levels as this means the SNB’s tolerance level has moved lower. This week’s data calendar will be largely overlooked given the geopolitical dominance in markets, however Wednesday’s eurozone inflation print will be key ahead of next week’s European Central Bank meeting as inflation has been creeping up increasingly higher over the last months and Russia’s war on Ukraine has only further emboldened inflation fears.


The US dollar remains strongly bid along with Treasuries after developments over the weekend in the conflict between Russia-Ukraine caused risk sentiment to deteriorate further, causing the safe haven dollar to rise against virtually every peer. Western allies have substantially ratcheted up sanctions against Russia since last week, and there seems to be a broader agreement on restricting access to SWIFT for a selection of Russian banks. This may lead to missed payments and large overdrafts within the banking system as it makes it more difficult, though not impossible, for these banks to make international payments. On top of that, the US, EU, UK and Canada have imposed sanctions on the Central Bank of Russia and blocked it from being able to use its $630bn of FX reserves, which is a first for an economy the size of Russia, and will significantly hurt the ability of the CBR to liquidate foreign assets and will likely lead to large bank runs and dollarisation.  On the military front, aggression continues on multiple fronts in Ukraine. According to local authorities, Ukraine has regained control in Kharkiv and continues to defend Kyiv. All eyes are now on Russian Ukrainian peace talks in Belarus at noon local time / 09:00 GMT, while details on the implementation of sanctions and counter-sanctions will also be followed closely.


Despite geopolitical risk premia being baked into FX prices as a whole this morning, the loonie continues to trade in a relatively robust manner given the higher oil prices this morning. As pointed out in morning resorts over the past week, the supportive dynamic of a higher oil price will likely continue to see CAD lag broader losses in the G10 space against the dollar as FX markets hunt for havens. However, US equities may be the deciding factor. At present, US equity futures are trading over a percentage point lower, however, any further losses upon cash open may result in more substantial CAD depreciation over the course of the day.

FX Elsewhere

Geopolitical conditions deteriorated substantially over the weekend as Western nations upped the ante with sanctions on Russia. Among the latest wave, certain Russian financial institutions have seen their access to the SWIFT payments messaging system revoked, while sanctions have also been levied on Russia’s central bank. While the targeted actions on SWIFT caught the initial headlines following increased speculation last week that they would be included in Thursday’s sanctions round, the measures implemented on the central bank are arguably more impactful as they render a large proportion of the CBR’s $630bn FX reserve war chest useless. This is due to the sanctions restricting the Bank’s access to financial markets and thus restricting them from liquidating all held securities in EUR, GBP and USD, while they also restrict access to physical FX reserves due to the majority of them being held in eurosystem accounts. This has resulted in the central bank announcing over the weekend that it would increase its supply of RUB liquidity at national banks as local reports suggest bank runs are taking place. FX markets this morning opened in an aggressive manner to the news that the CBR’s defence system has just been neutralised, with the ruble down over 23% at the time of writing. This reaction marks the most significant RUB response to sanctions in the past 20 years, highlighting the severity of the situation in financial markets. In response to the currency slide, the CBR raised interest rates by 10.5% to 20%, while government authorities mandated all companies to partake in mandatory FX revenue sales. The crunch in the currency has stabilised somewhat from the actions, but further pain is likely to be imminent as countermeasures from Russia on European commodity markets is likely following the actions by European nations. From a liquidity perspective, Russian assets are reportedly unbankable at the moment as counterparty risk is too high. This raises the risk of a halt in trading across all asset classes as financial institutions try to reduce balance sheet exposure en masse. On monetary policy in Russia, Governor Nabiullina is set to speak at 13:00 GMT in Moscow and her comments will be closely followed as the onshore USDRUB price has been reported to have traded above the 90 band, a level substantially lower than what offshore markets are pricing but one that is highly sensitive to the central bank, which is likely to prompt further actions by the central bank to stabilise onshore markets. In the political space, President Putin has put Russia’s nuclear forces on “high alert” in response to the actions by the west, which opens up a series of channels for further escalation, especially as military support is provided for Ukraine and countries like Germany vow to increase their military spending. Focus will be on peace talks in Belarus at 09:00 GMT.


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