Forex Major Currencies Outlook (Feb 28 – Mar 4)

USD 

Geopolitical action saw Russian President Vladimir Putin recognize independence of two separatist entities in south east Ukraine, Donetsk and Lugansk People's Republics (DLPR). The US, EU, UK, and Canada have reacted by widening the sanctions. The Nord Stream 2 pipeline project, which is designed to transmit Russian gas directly to Germany, was targeted first. Foreign participation in Russia’s sovereign debt issued after 1 March was banned as well as Russia’s two financial institutions, were blocked with financial sanctions. Additionally, new sanctions were applied to a number of high ranking individuals. This was considered to be just the first part of actions against Russia. On the early Thursday morning, during the Asia trading session, Russia’s has started military operations in Ukraine. This has led to jumps in gold and oil with Brent crossing the $100 mark and WTICrude reaching the $100 milestone later in the day. Natural gas prices exploded as well. Stock markets were down across the globe and yield on the 10 y US treasury fell to 1.85% as risk off mood gripped the markets and flight to safety ensued. The probability of a 25bp rate hike at the March meeting, according to the CME FedWatch Tool, is at 82.8%. 

This week we will have ISM PMI data as well as the NFP on Friday. Headline number is expected to be around 350k with the unemployment rate staying the same and wages rising 0.5% m/m. 

Important news for USD: 

Tuesday:

• ISM Manufacturing PMI

Thursday:

• ISM Non-Manufacturing PMI

Friday:

• Nonfarm Payrolls
• Unemployment Rate
• Average Hourly Earnings 

EUR 

Preliminary PMI data showed strong improvements in the services sector across the Europe. Eurozone services PMI came in at 55.8 vs 51.1 in January on the back of strong readings from both Germany and France. It managed to lift composite reading also to 55.8 level. Manufacturing reading stalled a bit and came in at 58.4, down from 58.7 the previous month and it is at an elevated level. A drop in German reading lead to the drop in the Eurozone reading, however French reading improved to 57.6 from 55.5 the previous month. A rise in services reading is a very welcoming sign, indicating that Europe has weathered the Omicron crisis, however as Markit notes: “service sector input cost inflation accelerated to a record high reflecting rising wages and soaring energy costs. The resulting overall rate of input cost inflation seen across both sectors rose to the second-highest on record”, mounting price pressures are set to keep inflation elevated in the coming months. The report will bring some upward revisions to Q1 GDP and should cause ECB to take a more hawkish stance. ECB member and governor of Central Bank of Austria Holzman, a well known hawk, stated that ECB should take more cautious approach and keep the stimulus for longer now that Russia’s military action occurred. 

This week we will have preliminary CPI reading for the month of February. Preliminary French reading surprised to the upside and came in at 3.6% y/y so we may get higher number than 5.2% y/y as expected. 

Important news for EUR: 

Wednesday:

• CPI 

GBP 

February PMI data (preliminary) showed that consumers left Omicron scare behind them and increased their spending on leisure, travel and entertainment. Services reading came in at a very high 60.8 vs 55.2 as expected and up from 54.1 in January. This has helped push composite up to 60.2 from 54.2 the previous month. Markit warns about growing price pressures seen in the economy. Manufacturing PMI was unchanged at 57.3. 

AUD 

Wage growth index for Q4 came in at 0.7% q/q as expected and slightly missed on yearly figure (2.3% vs 2.4%). Wage growth is a closely watched indicator by RBA as they want to see it north of 3% y/y before considering raising interest rates. The reasoning is that wage growth is necessary for inflation to be sustained. Q4 inflation was 3.5% y/y which puts real wages (nominal – inflation) into negative territory. 

This week we will have RBA meeting and a Q4 GDP reading. RBA will acknowledge that wages are rising but since they are still below their target they will not signal that they are in a hurry to raise interest rates. 

Important news for AUD: 

Tuesday:

• RBA Interest Rate Decision

Wednesday:

• GDP 

NZD 

RBNZ stayed through to its word and delivered a 25bp rate hike thus lifting the Official Cash Rate to 1%. In addition to a rate hike they have sounded very hawkishly in their statement stating that more tightening is needed as well as reduction of monetary stimulus. They have agreed to commence gradual reduction of their bond holdings accumulated during the Large Asset Scale Program (LASP). This will be done both passively, by stopping the reinvestment of proceeds from maturing bonds as well as actively, by outright selling the bonds. Bond sales will commence in July. 

New projections see official cash rate at 2.57% in March 2023 vs 2.3% previously. Inflation is seen at 3.2% by March 2023 vs 2.9% previously with it reaching maximum of 6.6% q/q in Q1 of 2022. OCR is seen at 3.35% in March 2025, much higher than previous peak of 2.6% back in November. They stated that employment is now above its maximum sustainable level and that when discussing whether to move the OCR up by 25 or 50 basis points. “many members saw this as a finely balanced decision” Governor Orr added that rate hikes of 50bp cannot be ruled out in the future as rate needs to go up significantly. Message was as hawkish as it gets and NZD is now buy-on-dips. 

CAD 

The escalation of crisis in Ukraine brought concerns regarding availability of Russia’s oil supply which in turn raised oil prices, however CAD did not profit much from it. USDCAD was propelled up on the money flows into USD, acting as a safe haven. CAD profited against EUR and finally broke under the support of 1.4377. 

This week we will have a Q4 GDP reading and BOC meeting. BOC is set to start its interest rate hiking path at the March meeting and deliver a 25bp increase. 

Important news for CAD: 

Tuesday:

• GDP

Wednesday:

• BOC Interest Rate Decision 

JPY 

Preliminary PMI data for the month of February showed serious declines in Japanese economy. Manufacturing dropped to 52.9 from 55.4 in January, services plunged to 42.7 from 47.6 the previous month and pulled with it composite to 44.6, down from 49.9 at the beginning of the year. This is the lowest services reading since May of 2020, it shows Japan’s struggles in containing the Omicron wave as new restrictions have been reimposed. Employment index showed weaker decline while business outlook declined, although still at a very healthy level. The report cites supply chain constraints and rising input costs for the drop to a 5-months low for the manufacturing reading. February inflation data for the Tokyo area saw headline number rise to 1% y/y from 0.5% y/y in January. This is the highest it is been since December of 2019. The main culprit for the rise were surging energy costs as ex-fresh food, energy component of the inflation improved slightly to -0.6% y/y from -0.7% y/y the previous month, but it is still deeply deflationary. 

CHF 

SNB total sight deposits for the week ending February 18 came in at CHF725.2bn vs CHF725.1bn the week before. A miniscule increase indicating that SNB is happy with EURCHF being at the current levels.

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