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Three Questions: Week of February 28

CalendarFebruary 28, 2022

Good morning, and welcome to Three Questions - a look at the big uncertainties facing currency markets in the week ahead.

Here are some of the things we're watching:

1. Will war in Ukraine increase worries about global stagflation?

The market’s focus this week will be on the impact of the war in Ukraine and on the secondary effects of intensifying Western sanctions.

Measures announced over the weekend are designed to hit Russian financial markets and the ruble, while retaining a carveout for energy and agricultural exports. But the scale of the sanctions and a broader deterioration in relations has raised the possibility of retaliation using the “gas weapon”. Europe currently imports roughly 41 percent of its supply from Russia, and the ongoing attempt to find substitutes is pushing up global prices.

Russia and Ukraine also account for a significant portion of global exports of wheat and of fertilizer, with production dislocations likely to put more momentum behind already-high food prices. Industrial metals mined in Russia are soaring in cost. And companies headquartered in the region are important for worldwide airfreight capacity, meaning that shipping delays are likely to lengthen.

Consumer demand is likely to suffer, as household pocketbooks are squeezed and sentiment levels fall - adding to the combination of rolling supply shocks, higher uncertainty, price rises, and depressed confidence which has marked the last year.

Central banks are unlikely to respond with the “shock and awe” campaigns that were under consideration a few weeks ago. With financial stability risks rising in the background, policymakers are likely to emphasize the virtues of gradualism and seek to stabilize market pricing near current levels - an approach that could allow inflation expectations to rise even further.

The risk of a stagflationary shock is certainly growing - we expect market worries to increase.


2. Will the Bank of Canada raise rates?

Yes, almost certainly.

After months spent telegraphing the move, Canada’s central bank is highly likely to raise its benchmark rate by 25 basis points on Wednesday, prioritizing its fight against inflation over insulating the economy against geopolitical risks.

It’s too soon to understand how the conflict in Ukraine will ultimately affect the broader Canadian economy. But the near-term impact is clear: soaring commodity and energy costs will exacerbate the inflation shock that saw year-over-year consumer price growth hit 5.1 percent in January. With the job market firing on all cylinders, economic slack disappearing, and the Omicron wave receding in the rearview mirror, the Bank should feel comfortable in lifting borrowing costs.

But Canadian dollar bulls won’t derive much satisfaction from the move. Markets have had a hike priced in for months, and the announcement won’t be accompanied by a press briefing or monetary policy report.

More action might come the next day, when Governor Tiff Macklem delivers an economic progress report and outlines the Bank’s views on growth and inflation. Overnight index swaps currently show seven interest rate hikes priced in for the year, while yield differentials between 2-year government bonds suggest that rates are expected to climb at a relatively similar pace in the United States.

If Macklem emphasizes growing uncertainties and dials optimism back, the Canadian dollar could weaken slightly - but we suspect that changes in global risk appetite will remain the primary drivers through the remainder of the week. No major currency is responding to domestic fundamentals at the moment - not even the US dollar.


3. What will Powell signal this week?

At Federal Reserve Chair Jay Powell’s semi-annual testimony to Congress on Wednesday and Thursday, he will need to address worries about both the inflation outlook and the host of financial stability concerns that stem from Russia’s invasion of Ukraine. Powell will most likely offer strong hints of a gradualist rate-hiking response, further damping expectations surrounding the 50-basis point hike mooted by St. Louis Fed President James Bullard.

The most recent inflation report, released last week, showed the Fed’s preferred benchmark rising 5.2 percent year-on-year, well above the 2.0 percent target. Other indicators suggest that business investment remains robust, even as housing sales show the impact of rising mortgage rates.

But while the health of the domestic economy would suggest it might be possible - and even desirable - to begin with a larger “catch-up” hike to begin the cycle, geopolitical considerations argue against such a path.

The scale of Western sanctions against Russia will make for considerable uncertainty in the markets, with the potential to spill over into the real economy. Concerns over exposures to Russian assets, whether in-country or in the form of external debt, could raise counterparty risk premia for banks and even for large corporations. And the immobilization of Russian reserves could remove a substantial source of dollar liquidity from short-term money markets, exacerbating these worries. It is likely that major Western central banks will need to act in unison to counter these worries by making liquidity facilities available.

The dollar is likely to see appreciation pressure arising from these financial market stresses, but also as deeper markets, a more advanced recovery, and greater resource sufficiency increase the attractiveness of US assets. Board Member Lael Brainard acknowledged in 2016 that the Fed’s own internal models estimate that a 1 percent rise in the trade-weighted dollar is equivalent to a 10 basis-point hike in the Fed Funds rate. This is another reason to signal a gradualist course, particularly if the confidence and real-income shocks of recent events are more likely to be felt more keenly outside the US, hitting exports.

Notwithstanding, the US’s domestic inflation issues, the Fed’s often-reiterated focus on “financial and international developments” is likely to play a big part in Chair Powell’s testimony.




CAD Current Account Balance, Q4

USD Advance Goods Trade Balance, January

USD Federal Reserve Speech, Bostic

CNY Manufacturing Purchasing Manager Index, February

AUD Reserve Bank of Australia Rate Decision


CAD Gross Domestic Product, Q4

GBP Bank of England Speech, Saunders

USD Federal Reserve Speech, Bostic

GBP Bank of England Speech, Mann

USD Federal Reserve Speech, Mester

AUD Gross Domestic Product, Q4


EUR Consumer Price Index, February

USD Federal Reserve Speech, Evans

USD Federal Reserve Speech, Bullard

CAD Bank of Canada Rate Decision

USD Federal Reserve Testimony, Powell

USD Department of Energy Weekly Oil Inventories

EUR European Central Bank Speech, Lane

GBP Bank of England Speech, Tenreyo

USD Federal Reserve Beige Book

GBP Bank of England Speech, Cunliffe

USD OPEC+ Meeting


EUR European Central Bank Meeting Minutes, February

USD Weekly Jobless Claims

USD Federal Reserve Testimony, Powell

USD Factory Orders, January

CAD Bank of Canada Speech, Macklem


BRL Gross Domestic Product, Q4

USD Non-Farm Payrolls, February

USD Baker Hughes Weekly Rig Count


“The disruption to transportation is worsening by the day. At least 22 tankers are clogging the Kerch Strait, a key Russian-controlled waterway, according to shipping trackers, because ports are closed. Greece, which operates up to a quarter of the global tanker fleet, is urging shipowners to pull their vessels from Russian and Ukrainian waters in the Black Sea, which is a choke point for several key commodities.”

Wall Street Journal: Car Parts, Chips, Sunflower Oil: War in Ukraine Threatens New Shortages

“...the Fed’s balance sheet might expand again before it contracts”

Credit Suisse: Global Money Dispatch

“the concept of restricting enemy’s access to financial markets and capital is nothing new. In fact, Russia endured this exact problem during the Bolshevik Revolution a century ago.”

Investor Amnesia: A History Of Invasions, Wars & Markets

Financial Times: Russia Sanctions List

“In theory, yes. There’s no reason why other messaging services, email, or telephone couldn’t serve as options in the event of a Swift ban. In practice, if you want to send money around the world relatively quickly, reliably, and cheaply, then not really.”

Financial Times: The Impact of Throwing Russia Out of Swift

“At the center stood a gangly 38-year-old medical professor in a rumpled suit. He’d just placed a $100,000 bet ($715,000 in 2019 dollars) on a single spin of the wheel. As the croupier unleashed the little white ball, the room went silent. He couldn’t possibly be this lucky… could he?”

The Hustle: The Professor Who Beat Roulette

“Chancellor Olaf Scholz, addressing Germany’s Parliament, said Europe’s economic powerhouse would nearly double its military spending, buy U.S.-made fighter planes for the first time in decades and create strategic energy reserves while shifting energy purchases away from Russia. Going forward, Germany said it would boost annual military spending above the North Atlantic Treaty Organization’s target of 2% of gross domestic product, from around 1.5% last year.”

Financial Times: As War Reshapes Europe, Germany Rearms to Counter Russia