It’s all about Ukraine

As we enter the end of February and the beginning of March, I could be discussing the very busy week of data ahead and its implications on monetary policy. But who are we kidding? It’s all about the Russia-Ukraine situation and evolutions in that situation will drive market sentiment and direction. I will circle back to that.


First of all, though, let’s take a look at the week ahead elsewhere. In the US and Europe, we have an avalanche of manufacturing and non-manufacturing PMIs, a probable Bank of Canada rate hike, two days of testimony on the Hill by Federal Reserve Chairman Jerome Powell, capped off by Friday’s latest US Non-Farm Payrolls release. In Asia, we see regional PMIs released, indicating the direction of travel of omicron impacted (or not) economies, an RBA rate decision on Tuesday, and most importantly, official and non-official China PMIs.


Looking at that line-up, I would say the most important snippet will be from the Powell testimony and whether the Ukraine situation threatens to derail the pace of tightening from the Fed, which should start at this month’s FOMC meeting.


Now that that is out of the way, it’s time to circle back to the only thing that really matters to financial markets and the world right now, Russia’s war in Ukraine. First of all, I must doff my hat to the Europeans, whose recalcitrance I have criticised recently. Over the weekend, sanctions were seriously escalated with Europe fully on board. Russian banks were cut off from SWIFT, although I can’t find a list of which Russian banks. Notably, the EU, Britain and the US are freezing the Russian central bank’s assets, meaning they can’t be deployed to intervene in currency markets. The list of airspace bans and asset freezes and travel bans on Russian individuals and companies is too long to list. Most notably, Germany, which had been dragging its feet, got on board and also authorised weapon sales to Ukraine and also massively hiked its defence budget. No more German soldiers turning up to NATO exercises with broomsticks.

President Putin will now have to accept that the “Western” powers are prepared to accept quite a bit of economic pain now to punish Russia. Naturally, he put Russian nuclear forces on high alert and Belarus, “voted” to allow Russian nuclear weapons to be stationed on its soil. Meanwhile, it appears that the Russian invasion is not quite going to plan thanks to the tenacity and bravery of the Ukrainian people.

Russian ruble plummets

A bank run has already started in Russia over the weekend, and the ruble, if it actually trades today, will be well above 100 to the US dollar. Inflation will immediately spike massively, and the Russian banking system is likely to be in trouble. None of that will bother Mr Putin, but his soldiers have effectively had a near 50% pay cut since the war has begun in dollar terms. If Mr Putin authorises the use of thermobaric weapons, even China is likely to drop him like a hot rock, and the endgame will have begun.


Asia has seen a sell-off in risk today and a rush to havens, not just because of the Putin nuclear headlines, or the imminent implosion of the Russian economy, but also because of the rippling effects across the global economy, starting with inflation. US stock futures have tanked, oil and gold have rallied, and the US dollar if pushing higher versus DM and Asian EM currencies. All straight out of the risk aversion playbook.


Asia stock markets, however, are proving very resilient, and in the case of China, Japan, and Australia, are actually rallying, which US futures have unwound some of their losses. Firstly, my initial impression of the SWIFT exclusion is that it is designed to still allow payments for energy and commodities. Also, Russian and Ukrainian officials will stage a meeting today on the Belarus border. Clearly, the perpetual buy-the-dip mega-bulls of the equity market are pricing in that some progress will occur on ending the war. I won’t disagree with the premise, only the timing.


The first sign of progress officially emerging from that meeting, should it occur, should spark an immediate rally by global hot money into risk. The longer-term consequences of cremating the Russian economy will be a global headwind, but in the shorter term, an even remotely positive meeting should swing market sentiment.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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