What Happened

• U.S. Dollar climbed 4.3% as global situation worsened with escalation in conflict and return of COVID-related shutdowns in China.
• Per the Bloomberg Dollar Spot Index (BDXY), these are the best levels since May 2020.
•  Euro plummeted to its weakest point in five years as energy crisis deepens, prices rise.
• Japanese Yen hit a 24-year low with ongoing central bank policy divergence.
• U.S. Gross Domestic Product for Q1 shrank (-1.4%) although a 1.0% expansion was expected.

GreenShootsFX’s View

• Hard to envision a long-term picture for FX guidance as the war evolves and the globe does not fully open post-pandemic.
• European nations will continue to find new alternatives to their interdependence with China and Russia after political frustration.
• Any headline out of China indicating a willingness to open ports and return to activity will be welcome news to dwindling equities.
• Talks for peace or troop withdrawal could change the tide any day as markets anxious.

In Focus

• April’s greenback gains are felt as fear driven as they were at the start of the pandemic.
• The Russian Ruble (RUB) was the only currency amongst the majors to climb significantly, recovering by 19.0%.
• Financial sanctions and the freezing of assets have done nothing to stop the Russian war campaign.
• Frustration across Europe and its allies have sparked talks of full embargos and increased military support towards Ukraine.
• A mix of spiraling equities and physical risks to the global economy make for USD dominance.

In Depth

Uncertainty and fear are boosting the buck with no clear end in sight.

It has been months since the invasion came about and the economic negativity surrounding it all is weighing heavily on everyone. The first half of 2022 has been characterized by a new struggle for a globe that also has not completely left the pandemic behind.

March was tough, but April proved to be very challenging as global food prices reached a record peak and the toll of war exacerbated. As violence keeps intensifying in Ukraine’s various regions, the world differs in approaches to Russia as well as the sanctions that have resulted from their perceived aggression by some of the global powers. Meanwhile, economic growth remains threatened and U.S. consumer sentiment is at a decade low.

There is no more positive situation than the world trading in peace. The current conflict and the uneven recovery from the worst of the COVID infections after two years are forever changing the dynamics of the globalized world that we had worked under previously.

Russian ambitions, suddenly mattering more than an established line of diplomatic and economic cooperation with the rest of Europe, are also shaping the geopolitical alignments that have allowed for a mostly connected world until now. Throughout April, the reports on atrocities across Ukraine forced a change in the mindset of most European leaders, who seemed to agree it was time to step up counter moves to Russia that would also cause harm to their own economies.

As a result, many countries have raised the argument for calling for a full embargo on Russian fossil fuels. This call for action is one of the main drivers in the collapse of equity markets’ values as investors understood right away this meant a major slowdown to come all over the Ancient Continent. Cutting off Russian energy imports means Germany, Europe’s largest economy, has to cope without a guaranteed flow of much-need resources that they have relied on for over three decades.

At this moment, it looks as if most nations in the EU are resolute to cut off Russia in a major way, but some economists argue that very high tariffs could seriously limit the awful regression that it would potentially signify to do a full break.

Furthermore, the European Union and its leadership are questioning their interdependence with China as a manufacturing hub as well as recent source of major investments in European companies as well as cultural items such as renowned footballing clubs.

China has not joined the EU, much less America, in condemning Russia’s leader Vladimir Putin choice to attack a neighboring nation. In refusing to do so, it appears to be exercising a strategic approach that is not considered a show of agreement, certainly representing an undesirable unreliability. Italy has already passed legislation preventing Chinese projects from coming to fruition in their country.

The rest of the world can probably join in doubting the world’s second largest economy since its hardline stance on eliminating COVID is reverberating all over amid shortages and high prices. Spain and others experienced inflation not witnessed in over three decades while in Mexico inflationary growth contributed to the fall of MXN after Consumer Price Index touched a 21-year high. Overall growth is in peril and the World Bank agrees after cutting its global outlook forecast from 4.1% to 3.2% for the year.

European Central Bank President Christine Lagarde has said that while the ECB could increase interest rates to try combating inflation, it cannot on its own bring down the price of oil. 50% of the inflation in Europe can be credited to rising energy costs.

We shall see how determined the Fed sounds at their May policy meeting, one in which the probability of a 50-basis-points hike stands at 99.0%. On April 12th, following the release of CPI, economists saw that some elements of core inflation weakened. Is it possible that inflationary pressures have peaked?

Additionally, with Q1 GDP coming in a contraction instead of expanding, is there reason to doubt the economy should see higher borrowing costs? The first in-person live press conference for the Fed since the pandemic started will likely feature further questioning of the Fed’s thinking.