Global markets have been jolted due to a sudden intensification in the Russia-Ukraine conflict. Ukraine's utilization of US-supplied long-range missiles in a strike on Russian territory and Moscow's lowering of the nuclear weapon response threshold have had a significant impact. As of now, this has only led to some commotion in the FX market, without major shifts. We suspect that the dynamics in dollar crosses were partly influenced by the dollar's overbought position, which may have curbed geopolitics-related gains. Simultaneously, the other two safe havens, the Japanese Yen (JPY) and the Swiss Franc (CHF), only received brief and limited support yesterday. USD/JPY once again broke above 155.0 this morning.
Markets' Cautious View on Ukraine
Markets seem to be approaching the Ukraine situation with caution and a more optimistic outlook. This implies that any further escalations are likely to have a much more profound impact on the foreign exchange (FX) market. European currencies (excluding the Swiss Franc) are undoubtedly the most susceptible. On the other hand, high-beta currencies that are geographically far from the conflict, such as the Canadian Dollar (CAD) or the Australian Dollar (AUD), will only be indirectly affected through risk-off sentiment. The oversold Japanese Yen probably holds the highest upside potential in the event of an escalation.Impact of the US Calendar and Fed Speakers
The US calendar remains relatively quiet currently. The only focus today will be on a few Federal Reserve (Fed) speakers, including the dovish-leaning Barr and Cook, as well as the more neutral Williams and Collins. An interesting development on the macro front was yesterday's release of state payrolls. This allows us to calculate the actual impact of the hurricane on the soft October national print, which was 12k. Our US economist analyzed the data and estimates that the payroll figure would have been around 121k without the hurricane and strike activities. We expect at least 100k of "technical" rebound in the November payroll print, which raises the bar for a hawkish surprise from the Fed.Potential for a Positioning-Driven Dollar Correction
We recently emphasized the possibility of a positioning-driven dollar correction. With the recent increase in geopolitical risk, it appears that the risks for the dollar are now more balanced. This suggests that there may be less resistance to a new upward movement in the greenback. The situation in the global markets, with the Russia-Ukraine conflict as a key factor, is constantly evolving and requires careful monitoring and analysis.