There has been a repricing of risk across asset classes with key currency crosses also suggesting a release of defensive positioning amongst investors. In particular, we have seen a so-far sustained sell-off in a previously well-bid US Dollar. Peace negotiations seemed to be making progress on Tuesday with Russia pledging to de-escalate military operations in Kyiv. Rhetoric within the market is seriously questioning the integrity of these commitments with no visible let up in attacks in besieged north-Ukrainian cities since such pledges were made. Will this matter for the Dollar and will it continue to lose ground against its key counterparts?
Markets had seemingly grown increasingly sanguine about Russia’s invasion of Ukraine with many energy commodity prices off of recent March highs. Natural gas futures, previously at the epicentre of global supply concerns are nearly 50% lower versus their peak on the prompt contract compared with prices earlier this month. The sell-off in the US Dollar therefore most likely only represents the pricing out of any residual risk and remaining defensive demand within the US currency.
From this perspective, given that the market now appears to hold a less defensive and more balanced USD positioning, an intensification and failure to meet de-escalation promises could lead to a build-up in USD strength once again. The momentary yield-curve inversion and ever-narrowing spreads in the US treasury market as we wrote about yesterday will also likely have a neutral short-term impact upon the Dollar. Whilst growth expectations are being drawn into question, US equity market peaks are generally healthy and considerably further out in time than the point of curve inversion reducing any risk of an immediate flight to safely.
Overall, as the market looks towards the May and June Federal Reserve decisions, the FX market should appear increasingly detached from the conflict in Ukraine. The Federal Reserve and market analysts alike have all been quick to note the nature and degree of monetary tightening in the United States will be data dependent. The US Dollar is therefore far more likely to experience volatility ahead of and during key data releases, including this Friday’s non-farm payrolls report, than it is from events in Ukraine.
Discussion and Analysis by Charles Porter
Click Here to Subscribe to the SGM-FX Newsletter
Related Insights
Morning Brief – Calling the bluff
Charles Porter
Thu 15 Dec 2022
Calling the bluff As expected, the Federal Reserve raised interest rates in the United States yesterday evening by a further 50 basis points. As a result of this policy adjustment, immediate target policy levels now stand at 4.25-4.5%. As also expected, the Fed pushed back fairly hard on the idea that it is ready to […]
Morning Brief – Pencil to pen
Charles Porter
Tue 13 Dec 2022
Pencil to pen As with any year ahead, 2023 has been fervently speculated over by market participants. Whilst forecasts for the forthcoming year take great priority every year, 2023 has perhaps the most divergent set of forecasts between analysts and institutions on recent record. Across asset classes and between institutions the core themes expected to […]
Morning Brief – False Illusions
Charles Porter
Tue 6 Dec 2022
False Illusions On Friday last week markets had got very exuberant over comments made by the Federal Reserve Chair the day prior. As a result of the interpretation of those comments, the US Dollar had dropped several cents to trade at its recent lows. There was a narrative that was being pieced together and justified […]
