Russia's invasion of Ukraine overwhelmed other drivers of the foreign exchange market. When everything was said and done last week, the odds of a 50 bp hike by the Federal Reserve in the middle of March was little changed slightly above 25%. The odds of a 50 bp hike by the Bank of England have been reduced from a little over 60% before the US government's warning that a Russian attack could happen at any time on February 10 to 36% on February 18. It has halved again last week to about 18%. On the other hand, the market is discounting a 75% chance that the Bank of Canada hikes by 50 bp at the March 2 meeting.
Dollar Index: The invasion of Ukraine initially
lifted the Dollar Index to our longstanding target just above 97.70, which is
the (61.8%) retracement of the losses since the March 2020 peak near
103.00. Just like it bottomed on January 6, 2020, as the Capitol was
overwhelmed, it is possible the Russian attack marks a potential top in the
Dollar Index. The momentum indicators have not turned down, but we
suspect the market will test lower first. There is a small gap from the
February 24 higher opening. That gap (~96.24-96.28) may draw
prices. Ahead of that, the Dollar Index may find bids near 96.45. It may
take a break of the 95.75 area to boost confidence that a high of some importance may be in place.
Euro: The euro has been trending lower this
month, but the floor fell out when Russia attacked Ukraine. The euro,
which began the week pushing near $1.14 fell to almost $1.11. It
recovered to $1.1275 ahead of the weekend. We suspect there is potential
toward $1.1325 but the momentum indicators are still falling and the US two-year
premium over Germany edged up to 200 bp. It was a little below 140 bp at
the end of last year and near 175 bp at the end of January. There may be
upside risks to the eurozone's February CPI estimate, but the market has pushed
out the first hike to late Q3 from mid-Q2 seen before Russia/Ukraine emerged as a
key market force.
Japanese Yen: The dollar posted a potential key
reversal higher against the Japanese yen on February 24. It fell to a
three-week low near JPY114.40 before recovering to close above the previous
session high to reach JPY115.75 ahead of the weekend, a new for the week. The upper end of
this year's range, seen in early January and retested it on February 10, around
JPY116.35, appears likely to be challenged in the week ahead. The MACD and
Slow Stochastic are poised to turn higher. There is little chart-based
resistance ahead of the late 2016/early 2017 high around JPY118.60.
On the other hand, a break below JPY114.90 would call this constructive
view into question.
British Pound: Until the second half of last week,
sterling had been largely confined to a $1.35-handle especially on a closing
basis. There had been only one exception this month. However, the
risk-off spurred by Russia's attack saw sterling tumble a little through
$1.3275 for a new low for the year. It recovered but stalled in front of
$1.3450, which is the halfway mark of the decline from $1.3620 on February 23
to the low the following day. A move above there would likely meet resistance
near $1.3500. The momentum indicators have rolled over. However, a
move back below $1.3350 would signal a test on the lows. The 2021 low was
recorded in early December around $1.3165.
Canadian Dollar: The dramatic risk-off spurred by
Russia invading Ukraine pushed the greenback above the CAD1.28 cap to new highs
for the year near CAD1.2880. As risk appetites recovered so did the
Canadian dollar. The US dollar returned to status quo ante--where it was
before the Russian attack--near CAD1.2735. The MACD appears to be rolling
over while the Slow Stochastic is still moving higher. With the market pricing
in an 80% chance of a 50 bp hike on March 2, the risk seems either
disappointment with a 25 bp move or a buy the rumor sell the fact type of activity.
That said, forward guidance on the balance sheet could add help determine the
market outcome. The US dollar finished the week on its lows around CAD1.2710 and below the 20-day moving average (~CAD1.2720). The lower end of February's range
(CAD1.2650-CAD1.2660) offers support.
Australian Dollar: The Australian dollar gained a tad more than the New Zealand dollar last week (~0.74% vs. 0.72%) even though the
Reserve Bank of New Zealand delivered its third hike in a row and announced a
balance-sheet roll off and a modest amount of outright sales. The risk-of
move saw the Aussie turn back from its run to $0.7300 and slip below
$0.7100. It held the (61.8%) retracement objective of the gains seen
since the January 28 low near $0.6970. It recovered to push slightly above
$0.7235 ahead of the weekend, and closed on its highs. Still, some caution may be
necessary. The momentum indicators are rolling over, and if the Reserve
Bank of Australia pushes back against the rate hike expectations, the
Australian dollar could be vulnerable. The cash interest rate futures
have pushed out the hike to August from July, though the market has not given
up on a July move and has about a 90% chance. Initial support is seen
around $0.7180 and then $0.7140-$0.7150.
Mexican Peso: Like most of the other Latam
currencies, the Mexican peso was having a good month and was above its 200-day
moving average for the first time in four months. When the Russia news
broke the dollar screaming to around MXN20.7850 from a five-month low the day
before by MXN20.1575. The greenback's gains were cut and before the
weekend, it surpassed the (61.8%) retracement target a little below
MXN20.40. It settled below MXN20.35. Still, the dollar's downtrend this month has stretched the
momentum indicators, which have turned higher and the MACD did not confirm last
week's low, leaving a dollar-bullish divergence in its wake. At the same
time, the higher than expect bi-weekly headline and core inflation prints make
a 50 bp hike when Banxico meets on March 24 more likely. In fact, the
debate may be between 50 bp and 75bp rather than 25 bp and 50 bp.
Chinese Yuan: The yuan strengthened against the
dollar for the third consecutive week and for nine of the past 13 weeks. It
traded at a new four-year high before the weekend, with the dollar falling to
almost CNY6.31. It appears to have set a record high on the CFETS yuan
trade-weighted index. Several large banks have pulled back from Chinese bonds
in recent weeks, but foreign investors appear to have stepped up their
purchases for Chinese equities. The Chinese 10-year premium has been
halved to less than 80 bp over the past three months. The large trade
surplus and portfolio capital inflows drives the yuan higher. The
difference in over the last few weeks is that Chinese officials are not
protesting it in word or deed (e.g., the daily reference rate). The next
notable chart point for the dollar is the low from Q1 2018 in the
CNY6.2450-CNY6.2700 band. On the other hand, a move above CNY6.33 would
suggest a low may be in place. The key issue is the extent of the PBOC's
patience. Perhaps the combination of yuan strength and a weak PMI will
encourage further monetary easing sooner rather than later.
Disclaimer
Reviewed by Marc Chandler
on
February 27, 2022
Rating:
