It’s mostly a dollar story in FX right now. A combination of elevated upside volatility in energy prices, equity under-performance and liquidity concerns continue to push investors seeking safety towards the greenback. As the Ukraine conflict shows no sign of imminent de-escalation (more Russia-Ukraine talks yesterday yielded no tangible result) markets remain firmly focused on the implications for the energy market. The US is reportedly looking for consensus among allies to stop or curb the import of Russian oil and might move autonomously should European countries continue to resist such a fully-fledged ban. Meanwhile, Russia has threatened to cut gas supply to Europe. This is an environment where markets are quite freely speculating on the magnitude of the supply shock to the commodity market, which is translating into big intra-day fluctuations in many commodity prices – even outside of the energy spectrum. The highlight in the US calendar today is the NFIB Small Business Optimism index, hardly a market-moving release, especially in the current market environment.
USD/CAD is back to levels that it was 2 weeks ago when Russia first invaded Ukraine. It seems that the loonie is caught between support from higher energy prices and USD demand. In the current environment, USD/CAD is range bound and it is tough to have a firm direction despite higher oil prices, a hawkish BoC. Domestic data releases are thin for most of this week, leaving the CAD exposed to the broader risk mood. Friday sees Feb jobs data with a market consensus is for a 125k gain in employment.
We estimate the current EUR/USD fair value at around 1.0930. Downside risks for the pair remain sizeable, with markets that may price in more of the adverse impact on the eurozone’s economy of a potential reduction of energy flows from Russia. With Russia currently threatening to cut the gas supply to Europe, upside risks to gas prices remain very significant, and so does the downside risk for EUR. Later this week, we expect the European Central Bank to pause its hawkish transition, which looks unlikely to give the euro any lifeline. Still, markets will be on the lookout for any currency-related comments. We think EUR/USD may remain under pressure until finding support around the 1.0640, 2020 lows.
Dollar strength continues to put pressure on the GBP, which saw a technical break and is currently pressing 1.3100 and could soon be testing the psychological 1.3000 support, a level last seen in November 2020. The conflict and potential Russia retaliation on the energy supply are likely to have a significant impact on the GBP in the coming days.
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