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Market Watch March 7th: All eyes on commodity markets
FX developments are now entirely subject to the buying frenzy in commodity markets as severe disruptions in supply chains become increasingly evident. Prices for certain commodities are updating highs at an unprecedented pace, rumors about embargo of Russian exports and threat of stagflation in Europe are becoming key trading themes in major asset markets. In the current juncture, pressure on European currencies and currencies of emerging markets is unlikely to ease soon.
Dollar: risk aversion adds hefty premium
The dollar continues to outperform the G10 currencies as flight from risk intensifies. Option premiums in FX surged while sell-off in European equities gathered pace. US statements that embargo could be imposed on Russian oil exports (which is about 5 million b/d) led to a surge in oil to $139 and ruble depreciation to 140 per USD.
Other signs of stress in the market include continued widening of the FRA-OIS spread (an indicator of credit risk in the interbank market). Despite the fact that the Fed has a sufficient set of tools to provide liquidity and a generally high level of liquidity in banks after the pandemic, high uncertainty forces banks to cut lending. More information on this issue will appear on Wednesday, when data on the demand for 7-day USD swap lines from the Fed will be released. Last week, the ECB's auction on 7-day USD swap lines indicated rather high demand - $272.5 million from European banks.
The cutoff of 7 Russian banks from SWIFT on March 12th could also hide many black swan risks. The freezing of Russian assets is already affecting European fixed income market - the German Finance Ministry was forced to issue additional bonds maturing in 2024, as some of them were included in the frozen Russian assets. At the same time, ETFs to emerging markets are now facing capital outflows and, due to the fact that exit from Russian assets is not available, other emerging markets are under pressure. The most vulnerable among them are Brazil, Mexico and Poland.
Euro: Conflict in Ukraine causes more pain
EURUSD continues to decline against the backdrop of a lack of prospects for an early resolution of the conflict in Europe, and so far, the balance of risks is skewed towards further decline. This is also indicated by huge demand for insurance against the fall of EURUSD in options, even exceeding the demand that was at the beginning of the pandemic in 2020. Some resistance to the current decline in EURUSD can be expected at 1.0760-1.0770, stronger at 1.0640, this is the low of March 2020:
Pound: better than euro, but not very good either
At the same time, the pressure on the pound is less strong, as a high percentage of extractive enterprises included in the FTSE 100 index and which are now doing better, reduces capital outflows. In addition, the Bank of England looks more determined to respond by raising interest rate to fight excessive GBP decline. From the technical point of view, EURGBP has broken through the important support level of 0.8270, which in itself is a signal for further downside.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
FX developments are now entirely subject to the buying frenzy in commodity markets as severe disruptions in supply chains become increasingly evident. Prices for certain commodities are updating highs at an unprecedented pace, rumors about embargo of Russian exports and threat of stagflation in Europe are becoming key trading themes in major asset markets. In the current juncture, pressure on European currencies and currencies of emerging markets is unlikely to ease soon.
Dollar: risk aversion adds hefty premium
The dollar continues to outperform the G10 currencies as flight from risk intensifies. Option premiums in FX surged while sell-off in European equities gathered pace. US statements that embargo could be imposed on Russian oil exports (which is about 5 million b/d) led to a surge in oil to $139 and ruble depreciation to 140 per USD.
Other signs of stress in the market include continued widening of the FRA-OIS spread (an indicator of credit risk in the interbank market). Despite the fact that the Fed has a sufficient set of tools to provide liquidity and a generally high level of liquidity in banks after the pandemic, high uncertainty forces banks to cut lending. More information on this issue will appear on Wednesday, when data on the demand for 7-day USD swap lines from the Fed will be released. Last week, the ECB's auction on 7-day USD swap lines indicated rather high demand - $272.5 million from European banks.
The cutoff of 7 Russian banks from SWIFT on March 12th could also hide many black swan risks. The freezing of Russian assets is already affecting European fixed income market - the German Finance Ministry was forced to issue additional bonds maturing in 2024, as some of them were included in the frozen Russian assets. At the same time, ETFs to emerging markets are now facing capital outflows and, due to the fact that exit from Russian assets is not available, other emerging markets are under pressure. The most vulnerable among them are Brazil, Mexico and Poland.
Euro: Conflict in Ukraine causes more pain
EURUSD continues to decline against the backdrop of a lack of prospects for an early resolution of the conflict in Europe, and so far, the balance of risks is skewed towards further decline. This is also indicated by huge demand for insurance against the fall of EURUSD in options, even exceeding the demand that was at the beginning of the pandemic in 2020. Some resistance to the current decline in EURUSD can be expected at 1.0760-1.0770, stronger at 1.0640, this is the low of March 2020:
Pound: better than euro, but not very good either
At the same time, the pressure on the pound is less strong, as a high percentage of extractive enterprises included in the FTSE 100 index and which are now doing better, reduces capital outflows. In addition, the Bank of England looks more determined to respond by raising interest rate to fight excessive GBP decline. From the technical point of view, EURGBP has broken through the important support level of 0.8270, which in itself is a signal for further downside.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.