USD: Ukraine news not boosting safe havens for now – ING

Global markets have been shaken by a sudden escalation in the Russia-Ukraine conflict after Ukraine used US-supplied long-range missiles for a strike in Russian territory and Moscow lowered the threshold for response using nuclear weapons. So far, this has translated to some noise in the FX market, but no big moves. We suspect the dynamics in US Dollar (USD) crosses were partly still affected by the USD’s overbought positioning status, which may have contributed to curbing geopolitics-related gains, ING’s FX analyst Francesco Pesole notes.

Less resistance to a fresh leg higher in the Greenback

“In other words, markets seem to be cautiously leaning towards a sanguine view on Ukraine, meaning any further escalations should have a much deeper impact on FX. European currencies (excluding CHF) are inevitably the most vulnerable, whereas high-beta currencies that are geographically far from the conflict (like CAD or AUD) should only be affected indirectly through risk-off. The oversold JPY probably has the highest upside potential from an escalation.”

“The US calendar is still quiet and the only focus today will be on a few Fed speakers, including the dovish-leaning Barr and Cook and the more neutral Williams and Collins. An interesting development on the macro side, however, was yesterday’s release of state payrolls, which allows us to calculate the actual impact of the hurricane on the soft October country-wide print (12k). Our US economist crunched the numbers 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.  We recently highlighted the potential for a positioning-driven USD correction. With the recent increase in geopolitical risk, it appears that the risks for the USD are now more balanced, and we may see less resistance to a fresh leg higher in the greenback.”