Weekly market update 18 February – Dollar maintained its strength amidst Russian-Ukraine tensions, investors focus on upcoming RBNZ policy meeting in anticipation of further rate hikes

Weekly market update 18th February – Dollar maintained its strength amidst Russian-Ukraine tensions, investors focus on upcoming RBNZ policy meeting in anticipation of further rate hikes

1. The Dollar maintained above the 96 level by the end of last week as investors and traders monitored the evolving situation between Russia and Ukraine. The Russia-Ukraine standoff continues to see escalating tensions, and the U.S. Secretary of State Anthony Blinken agreed to meet with Russian foreign minister Sergei Lavrov next week. Additionally, Fed policymakers continue to reinforce the view that the target range for the federal funds rate should be raised soon, and that further tightening of monetary policy could be faster than the post-2015 period if inflation does not slow down. The Federal Reserve will also continue to reduce the pace of net monthly asset purchases, eventually stopping purchases by early March. Moving forward, the dollar looks to maintain its strength against other currencies as the world continues to watch the developing situation between Russia and Ukraine. The general consensus is also for the Fed to raise the federal funds rate sometime in March. In the coming week, investors will mostly be looking at preliminary GDP data release for a gauge on the performance and recovery of the U.S. economy thus far, as well as the core PCE price index for an idea of inflationary pressures in consumer markets.

2. The Euro and Pound both underperformed against the stronger U.S. dollar over the week. Specifically, the Euro weakened to $1.133 over the week as the Russia-Ukraine situation continues to reduce appetite for risk-on currencies in such uncertain times. Nevertheless, ECB President Christine Lagarde has reiterated that any change to the central bank’s policy will be gradual, leading most money markets to expect a 10 basis-point hike in interest rates by the next ECB meeting in June. Until such expectations are confirmed, we expect the Euro to continue underperforming against the Dollar. Going forward, the release of flash manufacturing and services PMI in Germany will be watched closely by investors as a gauge of how the major economy in the bloc is faring. On the other side of the Atlantic, the Sterling is also facing similar pressures against the Dollar, trading just slightly below the $1.36 level before the week ended. Latest data releases showed that the U.K. inflation rate unexpectedly accelerated to 5.5% in January, which was higher than market expectations of 5.4%, and general expectations are for inflation to peak at 7.25% by April. Additionally, real earnings in the U.K. labour market was shown to have dropped by 1.2%. Hence, general market consensus is for the BOE to hike its policy rate for the third time in its next policy meeting in March. During the week, monetary policy report hearings from the BOE will be watched closely for any hints of how the BOE’s stance on monetary policy will be like in the coming months.

3. Commodity currencies generally underperformed against the stronger Dollar over the week. The only exception is the Kiwi Dollar, which appreciated past $0.688 over the week in anticipation of the upcoming RBNZ policy meeting, during which market expectations are for the RBNZ to hike rates by another 25 basis points. Moreover, the latest data showed that New Zealand’s unemployment rate fell to 3.2%, and the inflation rate spiked to a 3-decade high of 5.9%, further cementing the general consensus of rate hikes in the upcoming meeting. However, the Aussie fell below $0.719 by Friday market close, while the Canadian dollar also saw a 0.31% underperformance against the stronger greenback over the week. Looking ahead, commodity currencies could remain under pressure with the Dollar’s strength expected to hold in the coming weeks. On the other hand, crude oil prices pared losses to trade around $91.40 per barrel at the end of last week, and prices are expected to stay within this range even with possible inflows of Iranian oil exports, due to geopolitical uncertainties and tight global supplies. Gold prices held around $1,900 per ounce, benefitting from the uncertain climate as a traditional safe-haven asset. However, with the strengthening dollar and impending rate hikes potentially reducing its appeal as a non-yielding asset, the upside on gold prices could be capped going forward.

Salzworth Asset Management