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Currencies Are Trading Higher This Morning, But Downside Risks Persist

USD - US Dollar

The rouble and Russian assets remain very much at the centre of market focus as the currency dropped by 30% before trimming some losses yesterday (USD/RUB currently trading around 98.00) and the Russian equity markets remain closed for another day. Meanwhile, stocks of Russian financial institutions and energy companies traded in Europe have come under severe selling pressure, and yesterday the CDS market temporarily priced in a 50%+ chance of Russia’s default in the next five years.  

Today, markets will look for indications on whether: a) Ukraine and Russia are willing to sit at the negotiating table, after a meeting between delegations yesterday yielded no tangible result; b) the Central Bank of Russia will step in with more measures to support the rouble and liquidity in the domestic market; c) Russian banks will be excluded from SWIFT; d) Western economies will introduce import quotas on Russian commodities (Canada already plans to do so with Russian oil). 

In the current environment, commodity currencies that are not geographically close to Russia (like the Canadian, Australian, and New Zealand dollar) may continue to find some support, while the whole bloc of European currencies continues to look quite vulnerable. Data is set to continue playing a very secondary role for now. In the US, the ISM manufacturing is expected to inch higher today, and two Fed members – Raphael Bostic and Loretta Mester – are set to deliver remarks. 

CAD - Canadian Dollar

The CAD is trading in the middle of the pack of G10 currencies on the session against the USD. Despite the looming BoC policy decision tomorrow, external developments will continue to shape the CAD’s performance in the short run. At the moment, we do not think that the international situation will derail the widely expected BoC tightening, with a 25bps hike. The policy decision—or Governor Macklem’s Economic Progress Report speech on Thursday— should provide a bit more perspective on the bank’s balance sheet plans; higher rates should provide the CAD with broad support, especially against those currencies where central bank policy action this year is less likely. Trade support should lift the CAD broadly later this year. Observe the USD/CAD Chart.

EUR - Euro

European currencies are facing a moment of relative calm but remain quite vulnerable to developments on the military and sanctions side. A key theme for the euro, as the European Central Bank 10 March meeting draws nearer, is whether the recent turmoil has caused a U-turn in plans for faster policy normalization and earlier tightening: today’s CPI figures out of Germany are set to have some market impact despite investor focus being firmly on Ukraine. We expect to see a rise in February’s German headline inflation to 5.1%, in line with expectations, which may offer some support to the euro as markets may at least cement their pricing for a September ECB hike after having re-priced the timing for policy tightening in the past weeks. All in all expect evidence of accelerating inflation to help EUR/USD hold on to the 1.1200 level for now, although sanctions/retaliation and rising commodity prices still suggest a downward-tilted balance of risk for the pair. 

GBP - British Pound

The pound is set to remain highly sensitive to any news regarding a possible curb in gas flows from Russia and more spikes in gas prices, although a somewhat reduced volatility is allowing some tentative stabilization around the 1.3400 mark in GBP/USD since yesterday. Still, we continue to see a clear prevalence of downside risks for the pair. 

Domestically, Bank of England MPC members Michael Saunders and Catherine Mann are set to speak this today, with markets likely to pay attention to any comments about the impact on policy from Ukraine’s conflict. 

Currency Chart

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