FX: Russian Invasion Tests Central Bankers This Week

The first week of March will be another busy one for investors. Russia’s invasion of Ukraine continues to rock the financial markets, with currencies and equities extending their losses. It is impossible to judge how far Russian President Vladimir Putin will go in his attempt to overthrow Ukraine’s democratically elected government. A large military convoy stretching more than 17 miles has moved to the perimeter of Kyiv in preparation for a more intensive attack. The Russian economy will be hit hard by economic sanctions, the plunging and all the steps taken by other countries to freeze Russia out of the financial system. Worries about consequences for the global economy is one of the main reasons for the broad-based decline in bond yields and sell-off in global equities.

The RBA could stay tight lipped. It is not expected to change monetary policy. And while a rate hike could happen some time this year, with the recent uncertainty it may choose to keep its outlook unchanged until the outlook clears. The Bank of Canada, on the other hand, is expected to raise interest rates. Earlier this month, the market was pricing in a 70% chance of a half-point hike, but now those odds have dropped to 20%. A quarter-point hike is a done deal, and if the central bank opts for the smaller move, could jump back above 1.2750. However, if it looks past the conflict and cites the need to get ahead of intensifying price pressures, USD/CAD should test 1.26.

The main focus will be on Powell. The Fed made it clear that rates are rising in March, but the Russian invasion complicates the outlook. The war in Ukraine won’t change the Fed’s plans to hike in two weeks time because inflation is running at its highest rate in four decades, but it may slow its tightening cycle. The big question tomorrow is what Powell will say about the economic implications of the invasion. If he focuses on high prices and the need to get ahead of it, the should trade higher on the premise that the tightening cycle will proceed as planned. However, if he expresses any material concern about the economic disruption, could fall further, dragging the greenback lower. Chances are, Powell will confirm rates will need to rise, but also say that it is still too soon to tell how the war will affect the economy. 

In this busy week, the Russian invasion of Ukraine will dominate headlines and determine currency flows, but aside from that, the top 5 events to watch will be the monetary policy announcement, the Bank of Canada’s , Powell’s testimony, U.S. and Eurozone CPI. We’ll also have our eye on Chinese PMIs, U.S. ISM, along with fourth-quarter GDP reports from Australia and Canada.