What Happened

• The buck was pulled in different directions but managed to pull off a 0.7% increase in value.
• Russia’s invasion of Ukraine continued throughout March, only bringing further death, instability, and commercial trade insecurity.
• Russian Ruble recovered by 33.0%, while other commodity-based currencies such as BRL, ZAR, and MXN surged 4.0% or higher.
• “Aussie” and “Kiwi” also climbed by 3.0%, yet other majors fell, and Japanese Yen hit a six-year low.

GreenShootsFX’s View

• Volatility is back to levels experienced as the pandemic first began with doubts over the length and damage of Russia’s campaign.
• Russia became the world’s most sanctioned nation, but there remains an energy interdependence Europe cannot shake off.
• Euro will be particularly sensitive as France holds Presidential elections and a diplomatic solution is sought by Ukraine and allies.
• Keep an eye for the unexpected as the war and COVID resurgence test market strength.

In Focus

• March witnessed a lot of movement.

• Regardless of turbulence, the buck has managed three months of consecutive gains per the Bloomberg Dollar Spot Index.
• Mexican Peso climbed to its strongest levels since May 2021 following another hike by Banxico and the rise of commodities prices.
• The Antipodean tender of Australian (AUD) and Kiwi Dollar (NZD) recovered their early-year losses and trade around their best since Oct.

 In Depth

The view – a world working towards resolution is keeping USD afloat.

Predictable moves by central banks clash heads with conflict uncertainty.

History has shown us plenty of evidence that invasions can take a long time. This thought did not seem to cross Russia’s leader Vladimir Putin’s mind when he shocked the globe by ordering his troops into Ukrainian territory.

The goals Russia hoped to achieve within a short period of time did not materialize, such as getting rid of President Volodymyr Zelenskyy and establishing a pro-Russia interim government that would open the way for military tanks and personnel without any resistance. As we now know, the conflict has only increased tension between Russia and the rest of the world, put at risk its status as a trading nation, and isolated businesses and banks.

Indeed, the war has exacerbated trading issues that were trying to be resolved following a life-altering pandemic, and central banks must weigh carefully their actions going forward.

On March 16th, the Federal Reserve went ahead with a 25-basis-points increase to its interest rate, a move that was telegraphed clearly. In the press conference that followed the decision, Fed Chairman Jerome Powell spoke of the need to gradually hike as the labor sector is tight and inflationary growth too high and consistent to ignore. More importantly, he highlighted how positive the discussion was about the economy, with officials satisfied at the recovery, but worried at prices derailing it.

One official, in particular, was St. Louis Fed President James Bullard, who argued that it was time to take control of prices via a 50-basis-points hike instead. Although markets seemed bothered by the idea of a hawkish Fed after years of easing, equities rose after the Fed announcement of a dot-plot with multiple hikes for the year.

According to the Fed, they will be ready to do increments to the interest rate a total of seven times this year. However, stock markets reacted in opposite of what was forecast, instead taking in the optimism and confidence from the Fed as signs that the economy is strong enough to sustain the upcoming borrowing costs.

This monetary policy decision has certainly improved the buck, especially against the Euro, which continues its weak run, and it hit a low not seen since Summer 2020. Central bank divergence is favoring the buck at the moment, but there is a history for the U.S. Dollar that cannot be ignored in other instances of Fed determination to hike.

Per Fed and Bank of International Settlements data assessed by Bloomberg analysts, the U.S. Dollar has depreciated by an average of 4.0% throughout the last four cycles of tightening. Perhaps the Fed’s careful approach and lack of mystery have led to risk-taking once markets know what is to come. In fact, firms are already preparing for the buck weakening, with the Commodity Futures Trading Commission reporting that leveraged funds have cut their overall long-Dollar positions by more than two-thirds thus far this year. Keep in mind that the buck has risen by 7.0% in the last nine months.

Some economists are still making a case for why the Fed should not be so set on hiking interest rates. While there is reason to have faith in the economy, there are still millions of people who have not recovered from the COVID-19 crisis. In terms of labor, Black unemployment sits at 6.6%; a rate double that of the overall 3.8%, while the gender pay gap continues to widen, with women making 22.0% less than their male peers.

Financial security has taken a major blow with only 9.0% of low-income earners saying their pay kept up with the cost of living while young people borrowed more to live. In addition, 32.0% of millennials and 23.0% of Gen-Z owe more in credit card debt than they have in savings.

It is argued that following the 2008 financial crash, it would serve younger workers and savers if they did not have to worry about costlier loans, especially with everything from houses to autos only increasing in price as a scarcity of everything has hit all markets. We think Q2 growth and prospects for Q3 will matter greatly in the Fed maintaining their dot-plot. We feel there is an opportunity for the Fed to exercise dovishness later.