What should have been a quiet start to a busy trading week turned out to be volatile beginning. Over the weekend, there were worries about an imminent Russia attack on Ukraine, but at the start of the New York session, Russia’s top diplomat Sergei Lavrov urged Vladimir Putin to continue diplomatic talks, to which the Russian president replied, “good.” This seemingly simple affirmation sent equities and currencies soaring, but the gains disappeared quickly. EUR/USD jumped as high as 1.1342 and ended the day below 1.1300. The Russia-Ukraine crisis remains a delicate situation that could go awry at any point. What we’ve learned today is that investors will respond positively to a deal. But once this geopolitical risk eases, the focus will return to the impact of rising interest rates on the global recovery. Investors are also skeptical about the possibility of an agreement. The risk of conflicts remains very high – hence the reversal in equities.
This is supposed to be a week focused on data that would shed light on how the U.S. and global economies have been faring since the beginning of the year. Retail sales, manufacturing and housing market reports are on the U.S. calendar, along with the German ZEW survey, Australian jobs report, U.K. jobs, inflation and retail sales numbers. For the most part, the appetite for U.S. dollars remains strong, with the 10-year Treasury yield ending the day at its highest level since January 2020. High gas prices and a rebound in auto sales are expected to lift consumer demand, while the tone of the FOMC minutes will almost surely be hawkish. The relentless rise in commodity prices has some banks like Goldman Sachs calling for a whopping seven rate hikes from the Fed this year. This forecast may be ambitious, but expectations like these are positive for the greenback.
We are also looking for the Canadian dollar to outperform this week. Canadian inflation and consumer spending numbers are in focus and the IVEY PMI report showed a sharp rise in price pressures last month. The Bank of Canada is widely expected to raise interest rates alongside the Fed in March.
The underperformance of sterling, on the other hand, is puzzling. U.K. data should be good. According to the PMIs, there’s still labor shortages and, like the rest of the world, inflation is trending higher. Sterling is trending lower primarily on demand for U.S. dollars and risk aversion. The euro also extended its slide versus the greenback as U.S. yields pressed higher into the New York close. Revisions to Q4 Eurozone GDP and the German ZEW survey are scheduled for release tomorrow. Although Omicron fears eased, the European Central Bank’s less dovish turn could spook investors.
The worst performing currency today was the New Zealand dollar. The triple blow of risk aversion, U.S. dollar strength and weaker New Zealand data sent NZD/USD tumbling for the third day in a row. Service sector activity contracted at a faster pace for the sixth straight month in January. This follows a slowdown in manufacturing activity. The Reserve Bank of New Zealand may be one of the most hawkish central banks, but NZD is also one of the currencies most sensitive to risk appetite. The Australian dollar traded lower, but its losses were moderate compared with the drop in NZD. We expect softer Australian labor market numbers this week. Tonight’s RBA minutes may be less hawkish, so keep an eye on A$.
