JPY, Major Currencies Remain Volatile Amid Russia-Ukraine Tension

Gold nosedived while major currency pairs soared after Russia called for a dialogue over European Union security worries. Moscow rejected growing western concerns over Ukraine as hysteria and denied any war preparations. Despite denials of an imminent invasion, over hundred thousand Russian troops are reportedly stationed around Ukraine’s eastern border. With the world watching, and some governments pressing their nationals to flee Ukraine, international leaders try a diplomatic solution.

On his way to Russia to meet with President Vladimir Putin, German Chancellor Olaf Scholz in Kyiv met with Ukrainian President Volodymyr Zelensky on Monday. Joe Biden (U.S. President) and Boris Johnson (U.K. Prime Minister) also had a phone chat on Monday, agreeing that a diplomatic window shall remain open.

Aside from that, U.S. State’s Secretary (Antony Blinken) said on Monday that the U.S. embassy in Kyiv will close and relocate to Lviv, in western Ukraine. In a statement, Blinken said he authorised the actions to ensure the safety of his employees.

On February 16, Investors seemed scared when some western media have projected a probable Russian invasion, and the President of Ukraine (Volodymyr Zelenskiy) asked residents to wave the country’s flags while rhyming the national anthem in unison. However, the remarks were “sarcastic,” according to Zelenskiy’s office.

Meanwhile, the U.S. Federal Reserve continues to debate how aggressively to raise interest rates in March. On Monday, Fed President (James Bullard) reiterated his prior demand for a hefty 50 basis point rise.

On the other hand, Bullard’s colleagues seemed more cautious. The Fed will issue its latest meeting minutes on Wednesday. The Reserve Bank of Australia (RBA) published its minutes earlier in the day.

According to Kim Mundy (Commonwealth Bank of Australia’s Senior Currency Analyst), the dollar is supported in the short term by the Ukraine crisis and the Fed’s more aggressive attitude.

The simplest way to tell which currency is experiencing more significant influence is to watch out for the USD/JPY, which has been trading lower recently, indicating markets are keenly aware of the situation on the Ukrainian border. “We simply have to keep an eye on the news,” she continued.

To make matters even worse, the Bank of Japan’s dovish monetary policy relative to the U.S. suggests a further weakening of the yen. Last week, the Bank of Japan said that it would buy an unlimited number of 10-year government notes at 0.25%, while investors did not seem to be testing this 0.25% threshold.

On Monday, the Russian ruble was volatile but rose. However, it weakened again during the Asian session.

Global geopolitical concerns over Ukraine weighed on the dollar Tuesday morning in Asia. Dollar’s losses remained limited amid the discussion about how aggressively the U.S. should raise rates.

By 06:35p.m. Eastern Time, the U.S. Dollar Index had fallen 0.40% to 95.975 (11:40 p.m. Greenwich Mean Time).

While the USD/JPY fell 0.19% to 115.65, the Aussie (AUD/USD) plunged by 0.13% at 0.7151.

On the other hand, GBP/USD observed a bullish move, and the pair rose 0.6% to 1.3533. The same goes for the NZDUSD, which traded 0.02% higher at 0.6616.

After touching $1.1280 the day before, the EUR stood at $1.1306 in early Asian trade. The U.S. dollar remained a little below the two-week high achieved on Monday.

Dollar-denominated Ukrainian and Russian government bonds hit new lows. The 10-year OFZ ruble-denominated bond yields reached 10.17% since early 2016. Not to mention, prices change in opposite directions to bond yields.

The ruble is fundamentally supported by Russia’s record current account surplus, fueled by high commodities prices despite geopolitical concerns. The central bank’s tightening also supports it, making ruble assets more appealing.

Global Markets Outlook

Global markets fell on Monday as tensions rose. The FTSE 100 fell nearly 1% and the DAX 0.6%. The S&P 500 lost 0.4%, while the Dow lost 0.5%.

According to Interfax, several Russian units have reportedly departed the border area of Ukrainian and are returning to their bases. As of this writing, European indexes are all up, as are U.S. equities index futures. U.S. Treasury rates are climbing throughout the curve, as well as risk-sensitive currencies.

For now, the market appears to have calmed, but many market players view safe-haven assets as a refuge. Should war be declared, the Japanese yen is expected to be in high demand in anticipation.

Therefore, negative scenarios are possible for USD/JPY and EUR/JPY. Since late June 2021, EUR/JPY has been confined within a range of 132.72-127. 95. Technically, the EUR/JPY daily chart shows a trend north. An invasion might also support the Swiss franc (CHF/USD), the U.S. dollar, and gold (XAU/USD).

Russian military intervention in Ukraine is anticipated to boost oil and gas prices. With oil consumption reaching multi-year highs and prices at seven-year highs recently, there is concern that a possible war scenario or sanctions on Russia might reduce supply, driving up prices and fueling inflation fears. Russia is the world’s second-largest oil producer.

The seasoned strategist (David Roche) was asked if he envisaged a big 3-digit handle on the oil’s price in the case of conflict. Roche indicated that he expected oil prices to hit US$120 per barrel.

On the other hand, Russian stocks might remain under pressure as the Ukraine issue continues to escalate,” stated Aton investment management.

Essentially, “It makes sense to minimise Russian risks and avoid aggressive actions with Russian assets until the possibility of a military plot is eliminated,” said Evgeny Suvorov (Centro Credit Bank economist).

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