What should have been a quiet start to a busy trading week turned out to be a volatile one, says Kathy Lien of BKForex.com.
Over the weekend, there were worries about an imminent Russia attack on Ukraine but at the start of the NY session, Russia’s top diplomat Lavrov urged President Putin to continue diplomatic talks to which he replied, “good.” This seemingly simple affirmation sent equities and currencies soaring, but the gains disappeared quickly.
EUR/USD (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 returns 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 US and global economy has been faring since the beginning of the year. Retail sales, manufacturing and housing market reports are on the US calendar along with the German ZEW survey, Australian jobs report, UK jobs, inflation, and retail sales numbers. For the most part, the appetite for US dollars remains strong with ten-year Treasury yields ending the day at its highest level since January 2020. High gas prices and a rebound in auto sales is 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. UK 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 US dollars and risk aversion. Euro also extended its slide versus the greenback as US yields pressed higher into the NY close. Revisions to Q4 Eurozone GDP and the German ZEW survey are scheduled for release tomorrow. Although Omicron fears eased, the ECB’s less dovish turn could spook investors.
The worst performing currency today was the New Zealand dollar. The triple blow of risk aversion, US dollar strength, and weaker New Zealand data sent NZD/USD (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 to the drop in NZD. We expect softer Australian labor market numbers this week, but tonight’s RBA minutes may be less hawkish so keep an eye on A$.
To learn more about Kathy Lien visit BKForex.com.