Dollar Shows Limited Safe Haven Appeal

Overview: Russia's formal recognition of the two separatist regions in eastern Ukraine kicked out the legs upon which hope of diplomatic solution stood.  Putin's decision to send in troops into the regions is seen the start of the war.  The US, UK, and EU are preparing sanctions.  As one might expect, global equities fell, and bond yields have edged lower.  The large equity markets in the Asia Pacific region were off more than 1%. Europe's Stoxx 600 gapped lower and subsequently filled the gap, and is trying to snap a three-day slide. S&P futures have recouped most of their earlier declines, while  NASDAQ futures are off about 0.4%. The US 10-year yield is off slightly near 1.93% after earlier slipping below 1.90%.  Most European benchmark narrowly mixed.  The foreign exchange market reaction is somewhat counter-intuitive.  The Scandis and Antipodeans lead the major currencies higher. The yen, Swiss franc, and sterling are nursing modest losses.  Among emerging market, central European currencies are posting small gains, while most of the freely accessible currencies are weaker.  The JP Morgan Emerging Market Currency Index is recovering from inital losses after posting small declines over the past two sessions. Gold had rallied to new highs, a bit above $1914 but sold-off to almost $1895 in early European turnover where new bids emerged.  Crude oil jumped on the news and the April WTI contract neared $95. It is now near $94 after finishing last week a little above $90.  Natural gas prices have risen as well.  The US contract is up about 4.0%, while Europe's benchmark has risen by around 7.5%.  Iron ore fell by 2% after advancing 5% yesterday, and copper is heavy for a third session.  

Asia Pacific

Beijing's new regulatory checks on links to Ant is taking a toll on tech shares in China and Hong Kong.   Its efforts in coal and steel are seen boosting lending as well.  The surge in lending appears to have taken some of the urgency seen for more rate cuts.  Four large banks in Guangzhou, home of Evergrande, announced cuts in mortgage rates yesterday. Still, the soft CPI and next week's February PMI, where more weakness is expected may fan expectations.  Moreover, while the US and Europe lift Covid-related restrictions, Hong Kong and China appear to be moving in the opposite direction.   While China is in favor of checks on NATO, the recognition of separatist forces tends not to find much favor in Beijing, which is wary of such ploys being used against it.  

New record fatality tolls in Japan, and the delayed booster rollout undermining support for Japan's cabinet.  The latest poll showed an 8.3 percentage point slide to 43.4%.  Approval of the Kishida government's handling of the pandemic fell 6.3 percentage points to 38.9%, just above the disapproval rating of 37.9%.  Recall that last week, the government lowered its overall economic assessment for the first time in five months.  The extended social restrictions are due to end March 1.  An upper house election will be held in July, and it could determine the political future of Kishida.

The US dollar found support in early Asia near JPY114.50, its lowest level in almost three weeks.  It recovered to about JPY114.90. Still, if it cannot trade above about JPY115.15, it will be the fifth session of lower highs.  There are $1.8 bln in options at JPY115.20-JPY115.25 today.  Falling equities, lower yields, and the uncertainty over Russia's intentions could see JPY114.20 on a break of JPY114.50 today.  The Australian dollar is firm above $0.7200 but below the highs from the past two sessions around $0.7225.  The intraday momentum indicators warn that the upside may be limited now. Note that despite several efforts, it has been unable to settle above $0.7200 this month.  There is a A$1.7 bln option that expires there today.   The US dollar rose to almost CNY6.3450, its highest level in a week, before reversing lower and falling back toward CNY6.3330.  As seen in four sessions last week, the PBOC set the dollar's reference rate slightly weaker than expected (Bloomberg survey) at CNY6.3487 vs CNY6.3489. 


Russia formally recognized the two separatist regions in east Ukraine that it had fostered if not made of whole cloth.  Putin proceeded to send it Russian forces into the regions.  It is not yet clear whether he intends on taking the troops to the border with Ukraine forces.  Note that large parts of those regions, Donetsk and Luhansk are still controlled by Kyiv.  The tactics seems broadly similar to Russia's 2008 operations in Georgia and the recognition of Abkhazia and South Ossetia.  The US, EU, and UK are preparing sanctions. 

Germany's February IFO survey was better than expected.  The current assessment improved to 98.6 from 96.2.  It is the first increase in six months.  The expectations component rose to 99.2 from 95.8. It is the second consecutive improvement and is at its best level since last July.  The net effect was to lift the overall business climate reading to 9.89 from 96.0.  It reached 10-month low in December a little below 95.0.  This seems consistent with the recovery in the preliminary composite PMI reported yesterday of 56.2, indicating Europe's largest economy is recovering from the soft patch in Q4.  In December, the composite PMI had slipped slightly below the 50 boom/bust level.  

The euro initially approached last week's low (~$1.1280) but rebounded smartly and is make new session highs in late morning turnover in Europe near $1.1345.   There are options for 780 mln euro at $1.1330 and another 455 mln euros at $1.1350 that expire today.   The intraday momentum indicators are getting stretched.  Sterling managed to close above $1.36 yesterday, for only the second time since January 19, but was sold in late Asia to almost $1.3550.  It rebounded in early European turnover to almost $1.3600.  A consolidative North American session maybe the most likely scenario.  The euro is snapping a four-day slide against sterling that took it to almost GBP0.8300. A close above GBP0.8355-GBP0.8360 would be a constructive technical development.  


The geopolitical developments are front and center today in terms of talking points, even if the foreign exchange market reaction is surprising.  The economic calendar is jammed with house prices, the preliminary February PMI and the Conference Board's consumer confidence survey.  The Richmond's Fed manufacturing survey is also due.  The market may be most sensitive to the PMI but even that is unlikely to have much impact today.  Expectations for Q1 GDP appear to be solidifying around 1.3%-1.6% annualized pace.  A small upward revision is expected in Q4 21 GDP later this week.  The Fed's Bowman spoke yesterday and held out the possibility of a 50 bp hike next month if inflation comes in "too high" (whatever that means with CPI at 7.5% and the PCE deflator likely to rise to 6%--to be reported at the end of the week).  The odds of a 50 bp move rose to almost 32% from about 25% before the weekend.  

Canada's Prime Minister Trudeau will retain emergency powers for a few more days even after the protests have been cleared from downtown Ottawa and border crossings were re-opened.  The economic impact not seen a something that will derail the Bank of Canada from beginning its tightening cycle next week.  The central bank meets on March 2.  The swaps market has a little more than a 55% chance of a 50 bp hike discounted.  At the end of last month, slightly more than a 20% chance was seen.  

The US dollar reached a five-day high near CAD1.2770 in reaction to the Russian news but was sold in the European morning to almost CAD1.2725.  Yesterday's low was about CAD1.2720.  It probably takes a break of CAD1.27, where a $1.23 bln option expires later today, to signal anything of interest.  The lower end of this month's range is in the CAD1.2650-CAD1.2660 area.  Mexico and Brazil have light economic calendars today.  The greenback rose above its 200-day moving average against the peso (~MXN20.3475) for the first time in four sessions.  It has come back offered to straddle the MXN20.30 area in late morning European dealings.  Yesterday's low was slightly below MXN20.25 and last week's low was by MXN20.2360.  We suspect support in the MXN20.26-MXN20.28 may limit the downside today.  Many asset managers continue to extend Brazilian exposure. The dollar fell to almost BRL5.0750 yesterday, its lowest level since last July.  Yesterday's high near BRL5.1550 may offer a nearby cap.  


Dollar Shows Limited Safe Haven Appeal Dollar Shows Limited Safe Haven Appeal Reviewed by Marc Chandler on February 22, 2022 Rating: 5
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