The escalation of the crisis in Ukraine has so far had only a limited fall-out in global financial markets. Global equity markets have held in reasonably well over the last 24 hours, while in the foreign exchange (FX) space, commodity and selected emerging market currency pairs have continued to perform well and there is no clear sense of 'risk off' trading. The situation in Ukraine is incredibly fragile and investors remain nervous that Russian authorities lay claim to broader areas than those currently held by rebels and potentially now by the Russian military. The market reaction to the first tranche of Russian sanctions has been relatively benign so far.
Perhaps the surprise from yesterday's raft of sanctions was the early German announcement that the certification of Nordstream II will be halted. European natural gas prices are going to remain exceptionally volatile over the coming weeks – bounced around by the threat to European gas supplies from Russia and the lack of alternatives. Given the very uncertain picture in Ukraine, we suspect that investors will still prefer the liquidity and energy independence of the dollar. The US data calendar is light today and events in Ukraine will continue to dominate.
Most FX traders are still waiting for inspiration as USD/CAD continues to range trade and has barely participated in the lower USD higher commodity story that was witnessed elsewhere. Though the markets are forecasting 6 rate hikes this year, a clear break of the 1.26/1.28 window is required to drive direction. There isn’t much on the Canadian calendar today leaving the loonie to trade on broader market themes.
The euro (EUR) has held up reasonably well this week given the current risk environment. Similar to the Fed, events in Ukraine have knocked about 10bp off the pricing of the terminal European Central Bank (ECB) rate. Ahead of the crucial March 10th ECB meeting, look out for ECB speakers today in the form of François Villeroy de Galhau, Luis de Guindos, and Pablo Hernández de Cos. These are all at the dovish end of the spectrum and may be keen to emphasize the negative demand effects of higher energy prices. EUR/USD could break below 1.1280 to the 1.1220 area – or lower – should Russian lines move further West in Ukraine or natural gas prices spike further.
After a brief spike yesterday, the GBP dropped back below 1.36. It is likely that the GBP will remain supported by a more materials-weighted local equity benchmark and the UK government's more aggressive re-opening schedule. Today we will see Bank of England (BoE) heavy-hitters Andrew Bailey and Ben Broadbent testify to a parliamentary committee. We doubt they will want to push back (yet) on aggressive pricing of the BoE cycle, which is providing support to GBP and helping to insulate against higher energy prices. We continue to favor a move above the 1.36 area for the GBP/USD.
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