Sive Morten
Special Consultant to the FPA
- Messages
- 18,547
Fundamentals
So, guys, tough week... not maybe for FX and Gold market, but definitely for the stocks. The echo soon should reach the FX market as well. In our view, this is geopolitics and such events very rare past unsigned. And the second one is inflation again. Investors worry that Fed could start acting more aggressively.
Market overview
The dollar edged higher on Monday as traders continued to hold on to dollars but took the view that Federal Reserve tightening plans were largely priced in, while the euro eased from Friday’s two-month high.
The Fed meets on Jan. 25-26 and is not expected to move rates yet.
Bond markets have just passed a major milestone -- German 10-year yields have shot above 0% for the first time in nearly three years, potentially marking a return to more normal borrowing conditions in Europe. Negative bond yields in Germany, the euro zone's benchmark issuer, are a result of aggressive bond-buying by the European Central Bank, deployed to lift inflation which had undershot its target for years. So Wednesday's rise in Bund yields to as high as 0.025% is significant.
Eurozone inflation is at a record-high 5%, well above the ECB's 2% target, and the economy is recovering from the COVID-19 pandemic, so ultra-low yields no longer look justified. Wednesday's data showing British inflation at its highest in almost 30 years reinforced that price growth everywhere is proving sticky.
One driver pushing German borrowing costs higher is U.S. Treasury yields, which have surged on expectations the Federal Reserve could start interest rate hikes in March and even look to wind down its $8 trillion-plus balance sheet.
The ECB's 1.85 trillion euro pandemic emergency bond-buying scheme expires in March and money markets are pricing in two eurozone rate hikes before year-end even though the ECB insists price growth will abate on its own by the end of this year.
Germany has almost $2 trillion of outstanding debt, with 10-year bonds accounting for some 40% of issuance. So yields above 0% will sharply shrink the negative-yielding bond pool.
It's not a paradigm shift -- most investment banks still expect Bund yields to be around or barely above 0% by the end-2022. ECB projections still suggest inflation will end up at 3.2% on average this year and fall back below the bank's 2% target in 2023. It suggests the eurozone central bank, unlike its U.S. or British peers, won't be hiking rates imminently.
Currency market investors are less sure about the U.S. dollar's outlook now than they have been for many months, prompting sharp gyrations by the greenback last week despite red hot inflation data and a hawkish Federal Reserve.
The drop came after Fed Chair Jerome Powell said the U.S. economy is ready for the start of tighter monetary policy and data that showed the largest annual rise in inflation in nearly four decades.
Dollar bears view the recent volatility as evidence that a lot of good U.S. economic news was already priced in after international Monetary Market speculators exited 2021 with a net long position in the dollar valued at about $20 billion, close to the most bullish in two years.
For months, the dollar had been supported by the idea that monetary policy in the United States was likely to normalize at a faster pace than in many advanced economies. Now investors are growing more confident about other parts of the world, and looking for economies where growth could surprise to the upside.
Investors were not rushing to buy dollars even as short-term U.S. Treasury yields climbed. A year-opening selloff in bond markets sent 2-year yields up by about 23 basis points this year. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, noted that flies in the face of the trend during 2021.
The dollar could come under more pressure if global stocks start attracting money away from the United States, said Brian Rose, senior economist at UBS Global Wealth Management, noting the greenback was supported last year by strong capital flows into Wall Street. International investors hold a huge amount of dollar assets," Rose said. "We have thought for a long time that the dollar is vulnerable to capital flows suddenly reversing."
Paresh Upadhyaya, director of currency strategy at Amundi Pioneer, believes the dollar's safe haven-allure may falter if COVID-19 becomes less deadly and investors are less worried about severe economic ramifications.
"If we make that transition, all of a sudden the risks to growth diminishes," Upadhyaya said. The dollar loses that flight to quality sheen," he said.
Upadhyaya, however, has a health warning for those looking to jump on the dollar bear market band wagon, he said.
Markets may have not factored in the full extent of possible Fed hawkishness, including the potential some investors see for a 50-basis point interest rate hike as soon as March, Upadhyaya said.
A more aggressive Fed could also bolster dollar-focused carry trades, a strategy where investors sell low-yielding currencies to buy a higher-yielding one and pocket the difference, analysts at HSBC said in a note last week. Indeed, some investors used last week's dollar weakness as a buying opportunity.
Despite the dollar's recent wobble, the spread between Treasury and German 10-year yields is at 185 basis points, about as favorable it was to the dollar as it was two months ago.
The dollar declined on Friday, along with U.S. Treasury yields, while investors looked ahead to next week's Federal Reserve meeting for more clarity on the outlook for rate hikes. Expectations that the Fed will tighten monetary policy at a faster pace than previously anticipated had driven a rise in yields and the dollar earlier this week, and the U.S. dollar index was set for the biggest weekly percentage gain since mid-December.
U.S. Treasury yields fell as stock market declines reflected poor risk appetite, while concerns about potential conflict in Ukraine drove demand for the safe-haven debt.
Markets are pricing in as many as four rate hikes this year, starting from March and expect the Fed to start trimming its $8 trillion-plus balance sheet within months. Next week's Fed meeting could shed some light on how fast it will tighten.
Traders said that investors were closely watching a meeting between Russian Foreign Minister Sergei Lavrov and U.S. Secretary of State Antony Blinken due later today in Geneva amid Western fears that Russia may invade Ukraine.
The U.S. Federal Reserve is likely to lead the way, hiking rates possibly as soon as next week, while the Bank of Japan, sitting at the other end of the spectrum, is likely to keep policy exceptionally loose for years to come.
Indeed, expectations for quicker Fed action have already pushed up borrowing costs across the world and the yield for 10-year German bonds briefly moved into positive territory this week for the first since early 2019. Georgieva said containing the pandemic and boosting vaccination rates was imperative to address the widening gap between rich and poor countries, and to secure future growth for all. "The world must spend the billions necessary to contain COVID in order to gain trillions in output," she said.
The problem with inflation is that its rates now vastly differ around the world, leading to varying degree of social and political tension as the price of everyday consumer goods from food to fuels, soar. The big difference is that the U.S. recovery is well advanced, leading to the sort of wage surge and labour market stress others are not yet experiencing.
Until last week, even the suggestion that the European Central Bank could start raising rates this year was fanciful. But more than 10 basis points of tightening is now being priced in, and even the Bank of Japan is debating how soon it can start telegraphing an eventual interest rate hike.
The dollar often strengthens ahead of the start of a Fed tightening cycle then eases off once it gets underway. While the Fed won't change policy later this month, it will likely clear the runway for liftoff in March, and give further detail on when and how it will start reducing its balance sheet.
A major risk event usually sees investors rushing back to bonds, which represent the safest assets on planet and this time may not be different, even if a Russian invasion of Ukraine risks further fanning oil prices -- and therefore inflation.
Other safe-havens include gold, already at two-month peaks as well as the yen.
COT Report
The dollar's slump, despite a raft of positive news that should be the springboard for a strong start to the year, is puzzling. But puzzled or not, hedge funds are sticking to their guns, betting that the greenback will soon bounce back. Pulling back the lens a little, the dollar was on the skids before the turn of the year. It has now weakened four weeks in a row for the first time since July 2020 and only the second time in three years.
In a mirror image of last year, when it defied the overwhelming consensus that it would weaken, the dollar is going against the current consensus that is should strengthen.
Hedge funds, at least, seem to be holding their nerve. The latest Commodity Futures Trading Commission data for the week ending Jan. 11 show that speculators held a net long dollar position against a wide range of major and emerging market currencies worth almost $20 billion. That is little changed over the past six weeks. Indeed, as the following chart shows, funds' conviction over the past three months that the dollar will strengthen has been strong and steady.
The value of the net long dollar position fell to $12.59 billion for the week ended Jan. 18, from $19.34 billion the previous week. Scotiabank, in its report after the release of the CFTC data, said this was one of the largest weekly declines in long dollar positioning since mid-2020.
EUR shows solid boost of bullish sentiment, showing increase as in net speculative positions as in hedgers' positions against EUR appreciation.
NEXT WEEK TO WATCH
#1 Fed meeting
Inflation is front and centre: Markets will look to the U.S. Federal Reserve for hints on when and how much it may tighten policy to combat inflation at 40-year highs, whether CPI data forces Australia to admit the need for earlier rate rises, and what PMIs say about spiralling service sector costs.
Earnings too showcase companies' wage cost pressures. And finally - politics will complicate the picture with Russia, Ukraine and Italy all in the frame.
If markets have it right, the Fed's Jan.25-26 meeting will be the last one before interest rates lift off. Roughly four rate hikes are priced for this year, starting in March, but the rates outlook aside, markets will listen for what the Fed says about its $8-plus trillion balance sheet.
December meeting minutes showed lengthy discussions about reducing bond holdings. Fed Chairman Jerome Powell said the balance sheet could be shrunk faster than in the past. A Reuters poll predicts the Fed to start trimming its balance sheet by end-September, though some reckon it may happen sooner and faster than flagged. Hawkish signals could extend the selloff in Treasuries and tech shares.
#2 PMI release
Considering the spread of Omicron, global business activity held up surprisingly well in December, purchasing managers indexes (PMI) showed. But when advance January PMIs emerge on Monday, focus will be on how cost pressures are shaping up.
Composite input prices slipped last month as factories' supply chain delays eased, but U.S. service sector input prices rose to the highest since 2009. In Europe they stayed near November's record high, and rose in China for the 18th straight month. In countries where services contribute the lion's share of economic output, soaring costs add more uncertainty to the inflation outlook.
So, guys, as you can see - a lot of new inputs to think about, despite that price action was relatively quiet. The sentiment is gradually changing with advantage starts turning to the EUR. The reaons is - Fed activity is mostly priced-in with current USD level. This explains long period of dollar's growth. Second - EU should outpace the US within 2 years of economic recovery, and ECB could start rate change even in this year. Recent CFTC data confirms some shift of sentiment out of the US Dollar.
But the major question is how long-term this change will be. What if it will become just temporal bounce? With all things remain equal, it seems that EUR has the chance to show more extended upside bounce at least. WE have untouched Yearly Pivot around 1.16 area, so maybe it becomes the target.
It is really sounds optimistic but we see at least two issues that could become the cold shower. First is - more active Fed action. Say, if Fed hikes the rate for 0.5% in March. Second - military tensions in Eastern Europe. I hate to talk on politics because i'm absolutely dilletant in this sphere. But from economical point of view any conflict in Europe is negative for the EUR performance and advantage for the US Dollar as all-time safe haven asset. Thus, in a case of starting hot war the dollar should get additional support. And as wider and more resonance military activity is - the stronger the US Dollar.
I'm not a military expert and try to use just a common sense here. Personally I'm not sure that everything stops just on the negotiations stage between Russia and the US. Something important probably happens by few reasons. First is Russia can't press the backpedal. If it starts some geopolitical demands - it can't deny or forget them. Because in this case it will be huge damange to geopolitical reputation. Second, you should not be the prophet to understand that if Mr. V. Putin starts this mess - it has something in the pockets. We could accuse him in any sins that we want but we can't say that he is stupid. It means that he has some arguments that could affect the balance and negotiations results. Finally, Russian response comes definitely not in the Ukraine - it is too obvoius and expected. If somebody pushes you to the war in some region - it is definitely that you should start it somewhere else, or maybe not start at all, or respond differently, assymetrically. Even child undertsands this. I do not know what will happen but I'm 99% sure that no invasion in Ukraine happens. In fact, it is not the question of Ukraine, as it is too small bid. This is the struggle over domination in Europe. This is the real object of confrontation.
Actually the major thing that I would like to say is - we do not expect that it finishes lightly. In our view it should get serious geopolitical consequences in medium-term, which makes us not follow the bullish euphoria around EUR by far.
So, guys, tough week... not maybe for FX and Gold market, but definitely for the stocks. The echo soon should reach the FX market as well. In our view, this is geopolitics and such events very rare past unsigned. And the second one is inflation again. Investors worry that Fed could start acting more aggressively.
Market overview
The dollar edged higher on Monday as traders continued to hold on to dollars but took the view that Federal Reserve tightening plans were largely priced in, while the euro eased from Friday’s two-month high.
"With 3.7 Fed rate hikes priced in for 2022 and 2.3 for 2023, market participants seem to be inferring that the risks to policy pricing are now more balanced," Goldman Sachs told clients.
The Fed meets on Jan. 25-26 and is not expected to move rates yet.
Speculators’ net long U.S. dollar positions, or bets that the dollar will rise, edged lower in the week to Jan. 11, but they remained close to recent highs, suggesting investors are keen to hold the greenback amid "hawkish rhetoric from the Fed in recent months", Rabobank told clients. However, the sell-off in USDs in the spot market last week suggests that long positions had become crowded," Rabobank analysts said.
Bond markets have just passed a major milestone -- German 10-year yields have shot above 0% for the first time in nearly three years, potentially marking a return to more normal borrowing conditions in Europe. Negative bond yields in Germany, the euro zone's benchmark issuer, are a result of aggressive bond-buying by the European Central Bank, deployed to lift inflation which had undershot its target for years. So Wednesday's rise in Bund yields to as high as 0.025% is significant.
"It's driving home the message that yields are on their way up and that the era of 'lower for longer' is over," said ING senior rates strategist Antoine Bouvet.
Eurozone inflation is at a record-high 5%, well above the ECB's 2% target, and the economy is recovering from the COVID-19 pandemic, so ultra-low yields no longer look justified. Wednesday's data showing British inflation at its highest in almost 30 years reinforced that price growth everywhere is proving sticky.
One driver pushing German borrowing costs higher is U.S. Treasury yields, which have surged on expectations the Federal Reserve could start interest rate hikes in March and even look to wind down its $8 trillion-plus balance sheet.
The ECB's 1.85 trillion euro pandemic emergency bond-buying scheme expires in March and money markets are pricing in two eurozone rate hikes before year-end even though the ECB insists price growth will abate on its own by the end of this year.
Germany has almost $2 trillion of outstanding debt, with 10-year bonds accounting for some 40% of issuance. So yields above 0% will sharply shrink the negative-yielding bond pool.
It's not a paradigm shift -- most investment banks still expect Bund yields to be around or barely above 0% by the end-2022. ECB projections still suggest inflation will end up at 3.2% on average this year and fall back below the bank's 2% target in 2023. It suggests the eurozone central bank, unlike its U.S. or British peers, won't be hiking rates imminently.
Currency market investors are less sure about the U.S. dollar's outlook now than they have been for many months, prompting sharp gyrations by the greenback last week despite red hot inflation data and a hawkish Federal Reserve.
"Everybody had been positioned for a stronger dollar" going into the new year, said Jack McIntyre, portfolio manager at Brandywine Global. Then last week, the U.S. Dollar Currency Index , which tracks the greenback against six major currencies, fell as much as 1.2% before paring loses to finish the week down 0.6%.
The drop came after Fed Chair Jerome Powell said the U.S. economy is ready for the start of tighter monetary policy and data that showed the largest annual rise in inflation in nearly four decades.
Dollar bears view the recent volatility as evidence that a lot of good U.S. economic news was already priced in after international Monetary Market speculators exited 2021 with a net long position in the dollar valued at about $20 billion, close to the most bullish in two years.
For months, the dollar had been supported by the idea that monetary policy in the United States was likely to normalize at a faster pace than in many advanced economies. Now investors are growing more confident about other parts of the world, and looking for economies where growth could surprise to the upside.
Goldman Sachs recently said the euro area will outgrow the U.S. economy over the next two years. "I think we are seeing a transition in currency markets. It's less to do with relative monetary policy and more about relative growth," McIntyre said. It's not going to a straight line .. but at the end of 2022 the dollar will be weaker," McIntyre, who after having been generally neutral on the dollar for months has started selling dollars to fund the purchase of higher yielding currencies.
McIntyre said he is long the Australian dollar and the Swedish krona .
Investors were not rushing to buy dollars even as short-term U.S. Treasury yields climbed. A year-opening selloff in bond markets sent 2-year yields up by about 23 basis points this year. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, noted that flies in the face of the trend during 2021.
"This might signal a regime change in which the dollar peaks and begins reflecting a compression in relative growth and real yields versus the rest of world," Shalett said in a note.
The dollar could come under more pressure if global stocks start attracting money away from the United States, said Brian Rose, senior economist at UBS Global Wealth Management, noting the greenback was supported last year by strong capital flows into Wall Street. International investors hold a huge amount of dollar assets," Rose said. "We have thought for a long time that the dollar is vulnerable to capital flows suddenly reversing."
Paresh Upadhyaya, director of currency strategy at Amundi Pioneer, believes the dollar's safe haven-allure may falter if COVID-19 becomes less deadly and investors are less worried about severe economic ramifications.
"If we make that transition, all of a sudden the risks to growth diminishes," Upadhyaya said. The dollar loses that flight to quality sheen," he said.
Upadhyaya, however, has a health warning for those looking to jump on the dollar bear market band wagon, he said.
Markets may have not factored in the full extent of possible Fed hawkishness, including the potential some investors see for a 50-basis point interest rate hike as soon as March, Upadhyaya said.
"Given how fast the Fed were to react in terms of easing policy ...I also wouldn't rule out the possibility that the Fed may hike aggressively," he said.
A more aggressive Fed could also bolster dollar-focused carry trades, a strategy where investors sell low-yielding currencies to buy a higher-yielding one and pocket the difference, analysts at HSBC said in a note last week. Indeed, some investors used last week's dollar weakness as a buying opportunity.
"We have see some clients opportunistically buying dollars on this pullback," Peter Ng, senior FX trader at Silicon Valley Bank, said. "It has been a tough start to 2022 for the USD, but we view the fashionable disregard for relative monetary policy as unsustainable," analysts at HSBC said.
Despite the dollar's recent wobble, the spread between Treasury and German 10-year yields is at 185 basis points, about as favorable it was to the dollar as it was two months ago.
The dollar declined on Friday, along with U.S. Treasury yields, while investors looked ahead to next week's Federal Reserve meeting for more clarity on the outlook for rate hikes. Expectations that the Fed will tighten monetary policy at a faster pace than previously anticipated had driven a rise in yields and the dollar earlier this week, and the U.S. dollar index was set for the biggest weekly percentage gain since mid-December.
U.S. Treasury yields fell as stock market declines reflected poor risk appetite, while concerns about potential conflict in Ukraine drove demand for the safe-haven debt.
Markets are pricing in as many as four rate hikes this year, starting from March and expect the Fed to start trimming its $8 trillion-plus balance sheet within months. Next week's Fed meeting could shed some light on how fast it will tighten.
"Everything is going to be somewhat calm" until the Fed releases its statement on Wednesday after the two-day meeting, said Bipan Rai, North American head of FX strategy at CIBC Capital Markets in Toronto. It makes sense the dollar is somewhat muted today given the lack of real impetus from the data front."
Traders said that investors were closely watching a meeting between Russian Foreign Minister Sergei Lavrov and U.S. Secretary of State Antony Blinken due later today in Geneva amid Western fears that Russia may invade Ukraine.
The U.S. Federal Reserve is likely to lead the way, hiking rates possibly as soon as next week, while the Bank of Japan, sitting at the other end of the spectrum, is likely to keep policy exceptionally loose for years to come.
“The issue here is that what the Fed does, has implications for the U.S., it has implications for other countries, especially those that have high levels of dollar denominated debt," IMF Managing Director Kristalina Georgieva said. That could throw cold water on what for some countries is already a weak recovery," she told a World Economic Forum panel, adding that countries with high dollar debt should refinance now.
Indeed, expectations for quicker Fed action have already pushed up borrowing costs across the world and the yield for 10-year German bonds briefly moved into positive territory this week for the first since early 2019. Georgieva said containing the pandemic and boosting vaccination rates was imperative to address the widening gap between rich and poor countries, and to secure future growth for all. "The world must spend the billions necessary to contain COVID in order to gain trillions in output," she said.
The problem with inflation is that its rates now vastly differ around the world, leading to varying degree of social and political tension as the price of everyday consumer goods from food to fuels, soar. The big difference is that the U.S. recovery is well advanced, leading to the sort of wage surge and labour market stress others are not yet experiencing.
"When I look at the labour market, we are not experiencing anything like the great resignation and our employment participation numbers are getting close to the pre-pandemic level," European Central Bank President Christine Lagarde told the online panel. If only those two factors, if you look at them carefully, are clearly indicating that we are not moving at the same speed and we are unlikely to experience the same kind of inflation increases that the U.S. market has faced," she added.
Until last week, even the suggestion that the European Central Bank could start raising rates this year was fanciful. But more than 10 basis points of tightening is now being priced in, and even the Bank of Japan is debating how soon it can start telegraphing an eventual interest rate hike.
"As long as interest rate differentials do not move materially much further in the dollar's favor, it will become difficult for the dollar to extend its rally, now that yields outside the US are also progressively moving up, both in Germany and in Japan," wrote Unicredit's FX team on Friday.
The dollar often strengthens ahead of the start of a Fed tightening cycle then eases off once it gets underway. While the Fed won't change policy later this month, it will likely clear the runway for liftoff in March, and give further detail on when and how it will start reducing its balance sheet.
A major risk event usually sees investors rushing back to bonds, which represent the safest assets on planet and this time may not be different, even if a Russian invasion of Ukraine risks further fanning oil prices -- and therefore inflation.
"Clearly if the Ukraine story was to go wrong there would be quite a significant bid for Treasuries, and this notion of the 10-year getting to 2% would be put on hold," said Padhraic Garvey, regional head of research, Americas at ING.
Other safe-havens include gold, already at two-month peaks as well as the yen.
COT Report
The dollar's slump, despite a raft of positive news that should be the springboard for a strong start to the year, is puzzling. But puzzled or not, hedge funds are sticking to their guns, betting that the greenback will soon bounce back. Pulling back the lens a little, the dollar was on the skids before the turn of the year. It has now weakened four weeks in a row for the first time since July 2020 and only the second time in three years.
In a mirror image of last year, when it defied the overwhelming consensus that it would weaken, the dollar is going against the current consensus that is should strengthen.
Hedge funds, at least, seem to be holding their nerve. The latest Commodity Futures Trading Commission data for the week ending Jan. 11 show that speculators held a net long dollar position against a wide range of major and emerging market currencies worth almost $20 billion. That is little changed over the past six weeks. Indeed, as the following chart shows, funds' conviction over the past three months that the dollar will strengthen has been strong and steady.
The value of the net long dollar position fell to $12.59 billion for the week ended Jan. 18, from $19.34 billion the previous week. Scotiabank, in its report after the release of the CFTC data, said this was one of the largest weekly declines in long dollar positioning since mid-2020.
EUR shows solid boost of bullish sentiment, showing increase as in net speculative positions as in hedgers' positions against EUR appreciation.
NEXT WEEK TO WATCH
#1 Fed meeting
Inflation is front and centre: Markets will look to the U.S. Federal Reserve for hints on when and how much it may tighten policy to combat inflation at 40-year highs, whether CPI data forces Australia to admit the need for earlier rate rises, and what PMIs say about spiralling service sector costs.
Earnings too showcase companies' wage cost pressures. And finally - politics will complicate the picture with Russia, Ukraine and Italy all in the frame.
If markets have it right, the Fed's Jan.25-26 meeting will be the last one before interest rates lift off. Roughly four rate hikes are priced for this year, starting in March, but the rates outlook aside, markets will listen for what the Fed says about its $8-plus trillion balance sheet.
December meeting minutes showed lengthy discussions about reducing bond holdings. Fed Chairman Jerome Powell said the balance sheet could be shrunk faster than in the past. A Reuters poll predicts the Fed to start trimming its balance sheet by end-September, though some reckon it may happen sooner and faster than flagged. Hawkish signals could extend the selloff in Treasuries and tech shares.
#2 PMI release
Considering the spread of Omicron, global business activity held up surprisingly well in December, purchasing managers indexes (PMI) showed. But when advance January PMIs emerge on Monday, focus will be on how cost pressures are shaping up.
Composite input prices slipped last month as factories' supply chain delays eased, but U.S. service sector input prices rose to the highest since 2009. In Europe they stayed near November's record high, and rose in China for the 18th straight month. In countries where services contribute the lion's share of economic output, soaring costs add more uncertainty to the inflation outlook.
So, guys, as you can see - a lot of new inputs to think about, despite that price action was relatively quiet. The sentiment is gradually changing with advantage starts turning to the EUR. The reaons is - Fed activity is mostly priced-in with current USD level. This explains long period of dollar's growth. Second - EU should outpace the US within 2 years of economic recovery, and ECB could start rate change even in this year. Recent CFTC data confirms some shift of sentiment out of the US Dollar.
But the major question is how long-term this change will be. What if it will become just temporal bounce? With all things remain equal, it seems that EUR has the chance to show more extended upside bounce at least. WE have untouched Yearly Pivot around 1.16 area, so maybe it becomes the target.
It is really sounds optimistic but we see at least two issues that could become the cold shower. First is - more active Fed action. Say, if Fed hikes the rate for 0.5% in March. Second - military tensions in Eastern Europe. I hate to talk on politics because i'm absolutely dilletant in this sphere. But from economical point of view any conflict in Europe is negative for the EUR performance and advantage for the US Dollar as all-time safe haven asset. Thus, in a case of starting hot war the dollar should get additional support. And as wider and more resonance military activity is - the stronger the US Dollar.
I'm not a military expert and try to use just a common sense here. Personally I'm not sure that everything stops just on the negotiations stage between Russia and the US. Something important probably happens by few reasons. First is Russia can't press the backpedal. If it starts some geopolitical demands - it can't deny or forget them. Because in this case it will be huge damange to geopolitical reputation. Second, you should not be the prophet to understand that if Mr. V. Putin starts this mess - it has something in the pockets. We could accuse him in any sins that we want but we can't say that he is stupid. It means that he has some arguments that could affect the balance and negotiations results. Finally, Russian response comes definitely not in the Ukraine - it is too obvoius and expected. If somebody pushes you to the war in some region - it is definitely that you should start it somewhere else, or maybe not start at all, or respond differently, assymetrically. Even child undertsands this. I do not know what will happen but I'm 99% sure that no invasion in Ukraine happens. In fact, it is not the question of Ukraine, as it is too small bid. This is the struggle over domination in Europe. This is the real object of confrontation.
Actually the major thing that I would like to say is - we do not expect that it finishes lightly. In our view it should get serious geopolitical consequences in medium-term, which makes us not follow the bullish euphoria around EUR by far.