Calendar Week 09 – 2022

 

A week of round turns and high volatility left us pretty much back where we started in most markets. Whether you agree with Russia’s line of defending against the creep of NATO to its borders, or the West’s defence of democracy, the impact of the geopolitical risk will be around for some time to come. That means more volatility ahead in all markets. It will whipsaw around from each headline posting, whether that is positive or negative.

 

The markets were just warming to the idea of global growth improving as inflation spiked higher globally. Inflation is likely to remain high as energy and petrol prices will be impacted by the current conflict, but growth is more than likely to be crunched too. Central Banks will be cautious about raising rates with the uncertainty of the impact of sanctions and escalating military conflict. The market odds of the US Fed raising rates dipped and rallied, just like the stock market, to finish the week unchanged. We will keep an eye on this for you, with the Fed meeting mid-month on March 15/16th.

 

Volatility Ahead

 

The week ahead will bring more volatility from the conflict no doubt about that, and despite the relief rally late last week, I cannot see the stock market pushing too much higher with all the headwinds, unless Zelensky caves and gives Putin the iron clad guarantee not to join NATO.

 

Data-wise, this week we have the RBA meeting and unlikely to raise rates after only recently reducing their bond curve massaging. The Canadians too meet later in the week but they are expected to raise rates, doubling their Overnight Rate from 25 to 50 bps. That leaves Friday with the US jobs data where the focus should be on the hourly earnings and not the headline rate. Last month that surprised big time to the upside, but with inflation being rampant, the US really need to see wages also heading higher so that discretionary spending is still available to the US consumer. If wages fail to increase but products (from bowser to basic necessities) are increasing, people wont have cash to splash. And remember that the consumer spending is 70% of the US GDP, that is huge.

 

How to convert all this to FX trading? It is for sure a little tough right now. It is certainly difficult to use technical analysis with such volatility, and trading longer term views will be hard to ride the wild swings. So I suggest look to the bigger picture and trade that direction but try not to go for big moves or be in the market for too long.

 

Currency Guide in Conflict

 

So the bigger picture: Aussie dollar should do OK despite RBA not moving rates, the AUD will benefit from higher gas prices as sanctions crimp Russian exports somewhat. Australia is largest producer of Liquid Natural Gas, so is Russia’s major competitor for supplying Europe with energy. You could put the Loonie (CAD) in the same category as the AUD, but add the higher rates in as well. The Yen should also do OK thanks to risk off/safe haven flow from the geopolitical uncertainty. The Euro and Pound should be the weaker links in the current environment. Whilst they did rebound on Friday, I would prefer to be playing them from the short side until this conflict finds a resolution.