Risks posed by aggressive sanctions against Russian institutions have seen the emergence of a two-tier rouble market. Last night the onshore USD/RUB rate closed around 101 at a time that the offshore rate was being quoted at 115. It is hard to see that gap being closed anytime soon, although there is a chance that the offshore USD/RUB is dragged a little lower as Russian exporters are forced to sell their accumulated FX earnings over the coming days. European FX understandably remains under pressure with central banks ready to intervene should volatility and friction continue.
Even though the USD funding markets have calmed down a little, the dollar remains very much in demand. Liquidity considerations are one thing, but the macro dent from Putin's war will clearly cost Europe far more heavily than the US. FOMC Chair Powell delivers semi-annual testimony to the Senate today. As long as he continues to focus on the inflationary threats - as Joe Biden did last night - expect Fed tightening expectations to remain broadly intact and the dollar supported. Today also sees the February ADP report ahead of Friday's jobs data.
Expect to see a 25bp rate hike in Canada today. This is in line with what Governor Macklem has been signaling in recent remarks and fully warranted by a tight labour market and high inflation. The global re-pricing of tightening expectations has seen markets price out the possibility of a 50bp move today, although 25bp is fully embedded into CAD. The focus will be on forward-looking language and on the assessment of the impact from the Russia-Ukraine conflict on policy plans. The BoC will likely highlight some higher degree of uncertainty, but should not have much interest in turning materially less hawkish just yet.
The spike in oil and gas prices is set to further underpin Canada’s economic momentum, while geographical distance and strong links to strong US domestic demand are likely insulating the country from any economic spillover from the Ukraine turmoil. While some USD demand could keep USD/CAD around 1.2700 for now, EUR/CAD may soon test the 1.4000 level.
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