FX Monthly


Posted Under: Weekly updates

What Happened

  • A one-tenth move in the U.S. Dollar’s favor resulted from a month that witnessed a significant change to global stability and peace.
  • Russia invaded Ukraine at the end of the month, posing a new challenge to economic growth after recovery from a devastating pandemic.
  • Federal Reserve officials came out in defense of hiking rates gradually, reducing chances of a 50-basis-points increment.
  • Commodity-based currencies like Brazilian Real appreciated, but the MSCI Emerging Market Currency Index plummeted following war.

GreenShootsFX’s View

  • Russia’s aggression is threatening the financial system as steep sanctions have been placed along with freezing assets.
  • A humanitarian crisis may develop that further increases the buck’s value as a safe-haven.
  • The potential for a refugee crisis in Europe and the need for aid might stifle the European Central Bank’s ability to hike rates even once.
  • Volatility will remain high, as well as having an unclear future since the move by Russia went beyond the animosity anyone forecasted.

In Focus

  • The developing and raw material world improved, then Russia marched in.
  • South American currencies dominated February highlighting economic recovery in the region with BRL and PEN advanced over 2.0%.
  • Oceanic currencies of Australian and New Zealand Dollar also climbed, aided by good economic sentiment and less COVID impact.
  • Mexican Peso squeezed out a gain based on Banxico’s central bank, ability to continue increments to its borrowing rate.
  • Ukraine’s situation is a detriment to the much-needed global march towards growth.

In Depth

U.S. dollar finds clear guidance as safe haven in the midst of war as an unexpected invasion now redefines the post-Covid world.

February started with a focus on what the Fed could do. Consistency in inflationary pressure convinced central bankers that 2022 was the year to get back to increasing borrowing costs. Omicron, the latest COVID variant to cause major pain, affected the fourth quarter of last year and caused concern for how it could prevent advancement in the beginning of 2022.

Nevertheless, the attitude coming into this year was characterized by determination to start tightening regarding the quantitative easing purchases performed to keep the financial system afloat amidst a medical crisis.

At the moment of writing, the battle against the pandemic is overshadowed by real fighting taking place in Ukraine, which is fending off an invasion from Russia that has already taken lives.

Last month was indeed a tale of two halves as the start of February witnessed the data necessary for the Federal Reserve to merit its intent on tightening monetary policy and executing multiple interest rate hikes. U.S. Consumer Price Index registered its highest yearly figure since 1982 at a pace of 7.5%.

The question then became how many total hikes the Fed would need to actually combat higher prices, and traders started placing bets on a very aggressive Fed that would make more than four increases possible.

Such was the impact on markets to see that much inflationary growth that the chances of a 50-basis-points increase at the FOMC March 16th meeting went up as high as 63.0%. Further hawkishness was attached to it mid-month as the St. Louis Fed Governor, James Bullard, stated that he saw the need for something like seven total hikes by the end of the year. Furthermore, better-than-expected statistics revealed the highest increase in Retail Sales in 10 months, as January saw an expansion of 3.8%.

While it looked like the Fed was signaling a fast-paced approach to increasing interest rates, stock markets kept dwindling based on concern that the era of easy money would be coming to a close. However, members of the Fed, led by Vice-Chair Lael Brainard, stated that it would be prudent to gradually hike instead of shocking the system and that increments of 25-basis-points seem appropriate. Currently, chances of a hike in the next two weeks stands at 88.2%.

On February 24th, the Russian Federation moved troops beyond its borders into Ukraine. Following weeks of speculation about the need for military presence at the border, Russia’s President Vladimir Putin made a speech expressing the desire to target military facilities and take down threats to Russia’s territories. Additionally, in a tone that defied the progress made since the end of the Cold War, he said that Russian history dictated this move to regain land and power as Ukraine’s sovereignty is non-existent, per his assessment.

Putin’s ambitions for geopolitical control only add to the uncertainty that accompanies a globe that just started seeing the light at the end of the tunnel when it comes to COVID. The last two years have been defined by unprecedented chaos that forced scientific research towards a vaccine and cure to a respiratory illness affecting everything from travel to the distribution of goods from ports. Death and suffering have already defined much of the beginning of the 2020s, thus an armed conflict only cements our disappointment and sadness.

In the Euro-zone, interdependence and globalization defined the economy, and Russia, though not a member, has always played a key part in assuring that energy flows to those economies. The crisis is forcing European leadership to rethink overall relations and how it can move forward in seeking both energy as well as defense independence. One big example is Germany, whose balanced budgets and underinvestment have left it unprepared for this aggression.

Olaf Scholz, the new German chancellor, is starting his post-Merkel era having to deal with animosity and need to ask others for help. While trying to be very disciplined on the budget for decades, Germany has failed to back itself with a capable national defense, a strategic back-up of commodities, nor a robust infrastructure that reduces dependencies. As a result, companies such as Volkswagen are now idle during wartime.

One thing for sure is that the conflict is exacerbating the supply-chain woes for everyone, especially automakers. Russia is the third-largest supplier of Nickel used in lithium-ion batteries. Additionally, Russia supplies 40.0% of the palladium for catalytic converters, controlling car gas emissions. When it comes to Ukraine’s importance to the U.S., 90.0% of semiconductor-grade neon is imported from there.

We are stressed about the state of affairs and can only hope that resolution is closer than a deeper commitment to violence. Peace comes before wealth.