The ramifications of Russia's invasion of Ukraine roiled the capital and commodity markets. Kyiv is nearly surrounded. Ukraine officials' belated recognize that NATO is not coming to its rescue, and the EU does not seem in a hurry to join either. Ukraine officials have already conceded NATO membership. There is a small window to avoid a slaughter in Kyiv, and the market was hopeful ahead of the weekend.
If geopolitical tensions ease, the focus may shift back to monetary policy. The Federal Reserve, the Bank of England, and the central bank of Brazil are expected to hike in the week ahead. America's two-year interest rate premium over Germany has widened by roughly 30 basis points in the four weeks since the US warning on February 11 that Russia was poised to attack Ukraine. The premium Canada and Australia previously paid over the US for two-year borrowings have swung into a discount. The dollar rose to new five-year highs against the Japanese yen ahead of the weekend. As we discuss below, the yen is trading more like a carry-play and less like a risk-off haven. The common element here is one is being paid to be long the greenback.
Dollar Index: The Dollar Index jumped to about 99.40 to start the week, its best level since May 2020. It spent most of last week trending a lower and reached almost 97.70 on March 10. That met the (38.2%) retracement objective of the DXY rally from the US warning on February 11. It needs to establish a foothold above 98.80 to signal a retest of the highs and possibly a new high near 99.75. Recall that the high from March 2020 was almost 103.00. The momentum indicators are stretched. The Slow Stochastic has turned lower, and the MACD may be poised to do the same in the coming days. A break of the 97.15-97.30 area would sour the near-term technical tone.
Euro: The euro tested $1.08 at the start of last week and set the high for the week in the immediate reaction to news that the ECB was modifying its asset purchases near $1.1120. The gains were reversed as ECB President Lagarde spoke, and it settled below $1.10 and fell further ahead of the weekend. It pushed through the (61.8%) retracement of the week's gains near $1.0925. Below there, the $1.0880 may offer mild support, but the near-term risk extends back to $1.08. The MACD is flatlining but stretched. Slow Stochastic has turned up. Speculators in the futures market have amassed the largest net long euro position since the middle of last year. But the fog of war and the anticipated hike by the Fed on March 16 keeps the euro on the defensive.
Japanese Yen: With the US 10-year yield testing the 2.0% level and disappointing Japanese data underscored the risk of an economic contraction this quarter, the dollar rose above JPY117.00 for the first time in five years. The previous high seen in January and February was JPY116.35. The MACD has only recently turned higher, while the Slow Stochastic has been trending higher since late February. The greenback spent most of the pre-weekend European and US session JPY1116.80-JPY117.35. There is little chart-based resistance ahead of JPY118.00-JPY118.60. The yen's weakness despite the risk-off is notable. The 30-day correlation of changes in the exchange rate and changes in the S&P 500 has fallen to 0.04%. It peaked early this year, a little above 0.6%. On the other hand, the correlation between changes in the exchange rate and changes in the US 10-year yield has doubled from about 0.3% in early February to 0.67% at the end of last week.
British Pound: The outside down day on March 10 and the follow-through selling before the weekend cast bearish light on sterling. The prospect of a BOE rate hike on March 17 did not deter the bears from driving sterling to its lowest level since early November 2020, near $1.3025 ahead of the weekend. The momentum indicators are stretched but do not appear to have begun turning. A move above $1.3200 is needed to signal anything important. A quarter-point hike is fully discounted, and the swaps market recognizes a reasonable chance of a 50 bp hike at the next meeting on May 5. Note that $1.3165 corresponds to a (38.2%) retracement objective of sterling's rally from the March 2020 low near $1.14 and the high set on June 1 last year of almost $1.4250. The next retracement (50%) is $1.2830.
Canadian Dollar: The US dollar set the high for the year near CAD1.29 on March 8. With the help of a very strong Canadian jobs report, the greenback tested the CAD1.27 area ahead of the weekend. The MACD appears to be curling over, but the Slow Stochastic is still rising. A convincing break of CAD1.2700 sets up a test on the CAD1.2650-CAD1.2660 area. Over the past 30-days, the correlation between the change in the exchange rate and the S&P 500 is around -0.46%. The correlation between the change in the exchange rate and oil (April WTI) is about 0.25. The positive correlation is rare. Partly this seems to reflect the current dynamics where a rally in oil adds to the risk-off that weighs on the Canadian dollar. Indeed, the correlation between oil and the S&P 500 is mostly positive, but the rolling 30-day correlation has been negative since early February.
Australian Dollar: The Aussie has had a good ride, but it is over. Since the end of January, when it briefly dipped below $0.7000 for the first time since July 2020, it rallied 6.8% to peak near $0.7440 on March 7 before reversing lower. Follow-through selling saw it slide two cents from the high before bouncing. The bounce, however, faltered near $0.7365, the (61.8%) retracement of its slump before selling off again ahead of the weekend. The momentum indicators have turned lower, and a retest of $0.7240 looks likely, but we suspect the near-term risk extends toward $0.7200. Australia's February employment data will be reported early on March 17 in Canberra. Despite the pushback from the central bank, the futures market has slightly more than 125 bp of tightening priced in with the first hike fully discounted in July. The US two-year premium over Australia rose to 44 bp last week, the most on a weekly closing basis since February 2020.
Mexican Peso: The dollar has risen in eight of the past ten sessions against the Mexican peso for about a 3.25% gain. Only eastern and central European currencies have done worse in the emerging market space. Three other Latam currencies have led the emerging market currencies over the past two weeks: the Colombian peso (~2.5%), Brazilian real (~2%), and Peruvian sol (~0.9%). The JP Morgan Emerging Market Currency Index fell for the third consecutive week and is now off 4.6% for the year. Recall that on the eve of Russia's attack, the dollar was at four-month lows against the peso (March 23 low ~MXN20.1575). On March 8, it reached about MXN21.4675, its highest level since last December. Then, it pulled back and found support near MXN20.85, just above the (38.2%) retracement objective near MXN20.8125. The MACD might be trying to turn over, and the Slow Stochastic is a little ahead of it in making a turn. Mexico reported higher February inflation (CPI 7.28% vs. 7.07% in January) and strong January industrial production (1.0% vs. expectations for a 0.3% decline according to the median forecast in Bloomberg's survey). The changes in the exchange rate have become more correlated with the changes in the S&P 500, our proxy for risk appetites. Consider that when Russia invaded Ukraine, the correlation was flat. It was at -0.45% at the end of last week.
Chinese Yuan: The dollar bounced a little more than 0.25% against the yuan before the weekend and settled above the 20-day moving average (~CNY6.3260) for the first time since February 14. It does not sound like much, but it is the most the dollar has gained in a single day since last January. Broad-based dollar strength was the main driver. However, Premier Li acknowledged what many assumed, that to reach the 5.5% GDP target, more economic support is needed. The PBOC set the dollar's reference rate below where the median in the Blomberg poll had projected ahead of the weekend, but this may reflect the difficulty in valuing the Russian ruble. The 10-year Chinese bond yield reached new highs for the year last week near 2.87% but fell sharply ahead of the weekend ~2.79%). It was the biggest decline since last July. While acknowledging that the yuan is a closely managed exchange rate, making central bank intentions a vital consideration, we suspect there may be more near-term dollar upside potential. The dollar bottomed on February 28 near CNY6.3065. In terms of time and price, the patience of the dollar bears/yuan bulls may be being tested. The spike high from February 22 (~CNY6.3450) offers the initial resistance, while CNY6.35 is more important.
