GBP

The Bank of England has so far refrained from making any significant dovish signs in reaction to the Russian invasion. In fact, two speakers last week failed to suggest that any dovish pivot was in the cards for the institution. This enabled sterling to perform relatively well last week, somewhere in between the US dollar and the euro, and rise against every other European currency. This week there is almost no data of note on tap, so the pound will take its clues from events and releases elsewhere. However, we see the potential for a continued rally against the euro, based on both relative hawkishness of central banks and lower UK dependence on energy imports compared to the Eurozone.

EUR

The inflation report for February was of course completely overshadowed by the terrible news from Ukraine, but it still deserves mention. It was yet another upward surprise, showing strength both in the headline number and the core one, confirming that price pressures were already becoming widespread even before the stagflationary shock of the war. The ECB reaction is expected to be dovish, delaying the removal of accommodation that we had previously expected this week. However, any such delay will have to be more than compensated with additional tightening later on, if the ECB is serious about keeping inflation expectations in the Eurozone well anchored. For now, it does seem the path of least resistance for the common currency is down.

USD

The payroll report out of the US also failed to have the impact it would have had in normal conditions, but nevertheless, it confirmed the booming state of the US job market. Strong job creation came hand in hand with surprisingly mild wage pressures, though we would hold judgement till next month given the high volatility that these numbers have presented on a month-to-month basis. Chair Powell’s testimony to Congress was relatively sanguine about the war impact on the US economy, which is self-sufficient in energy terms and relatively isolated from the conflict. Powell made it clear that the rate-hiking process has not been derailed and the first 25 bp are coming in March. The contrast with the ECB’s apparent dovishness is stark and explains the tumble we saw in the EURUSD exchange rate.

CHF

The Swiss franc was one of the most volatile G10 currencies last week, soaring sharply against most peers and ending at the parity level against euro as the market flocked to safe havens due to increasing worries about the fallout from Russia’s invasion of Ukraine.

Although in the context of the war in Europe most recent inflation print might seem unimportant, it’s important with regards to the franc. Last week’s inflation data showed a major upward surprise, with price growth at 2.2% in February compared to 1.6% a month earlier. It was the highest print since October 2008 and on a month-on-month basis, prices increased by 0.7%, the highest pace since February 2009. Strong price growth, far above expectations, likely means the Swiss National Bank would want to refrain from significant interventions in the FX market to stop the franc from rallying further if the war in Ukraine continues to keep investors on their toes. The limited changes to SNB sight deposits last week further support this argument.

In the upcoming days, CHF will continue to react mostly to events in Ukraine.

AUD

The Australian dollar ended last week at its highest level in four months against the US dollar. Rising commodity prices boosted the AUD, due to Australia’s status as a net energy exporter and a producer of many other commodities.
As expected, The Reserve Bank of Australia kept the cash rate unchanged at a record low of 0.1% for the 15th month in a row during its March meeting. Governor Lowe expressed concerns that the war in Ukraine could increase inflationary pressures, but given that wage growth has not been able to keep pace with price increases, the RBA is in no hurry to raise interest rates.
Similar to all the other currencies, AUD will continue to be driven mostly by events in Ukraine.

CAD

The Canadian dollar showed a strong performance last week, due to rising commodity prices and the Bank of Canada’s decision to raise interest rates.
Last week, the Bank of Canada increased its target rate by 25 basis points to 0.5%, in line with expectations. It was the first hike since October 2018. In accompanying messaging, the bank emphasised it will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored. The Governing Council expressed the need for more interest rate hikes as inflationary pressures remain elevated. The bank also noted that the war in Ukraine is a major new source of uncertainty.
On Friday, February unemployment rate will be published. Even so, we think that the main driver of the exchange rate will be the situation in Ukraine.

CNY

The Chinese yuan was one of the best performers in the EM last week ending almost unchanged against the US dollar, confirming the currency’s status as a regional safe haven.

Recent news from China has been positive. PMI data released last week showed a small uptick in the official composite index and an unchanged level for Caixin one. This time, all of the indices showed expansion of both services and manufacturing. It’s a shy, yet welcome sign that China’s economy may be bottoming out after a difficult second half of 2021.

Yuan is one of the few non-commodity currencies that don’t suffer from the negative impact of the Russian invasion of Ukraine. We think this will continue to be the case. We’ll keep focusing on China’s economic data, with consumer and producer price growth prints on tap for this week, on Wednesday.

To stay up to date with our publications, please choose one of the below:

📩 Click here to receive the latest market updates
👉 Our LinkedIn page for the latest news
✍️ Our Blog page for other FX market reports

🔊 Stay up to date with our podcast FXTalk