07/03/2022

WILL THE WAR IN UKRAINE OVERTURN THE PLANS OF CENTRAL BANKS?

General Comment

The war in Ukraine and the Russian invasion, almost monopolize the interest of the markets during this period. Russian warfare continues unabated and there are fears and concerns that the war could spread to the wider region or even reach global size. The fire at the nuclear plant in Zaporizhzhia evoked Chernobyl memories and brought sad images of a nuclear disaster. The sanctions passed by almost all countries in the world are expected to hit Russia, but they will certainly hit other economies, and more so the European economies, which are energy-dependent on Russia. These developments have put to the thought central banks that planned tighter monetary policy and higher interest rates shortly. In the United States (which is less economically affected by the war) the plan is likely to be followed, but there are serious doubts as to whether this will happen in Europe as well. An increase in interest rates could lead to a recession and hit the labor market in an already difficult situation.

In terms of regular financial announcements, new jobs in the United States (NFPs) were announced last Friday. In February, 678K new jobs were created, a number much higher than the 400K that markets and analysts expected. The other important announcement of the week was inflation in the euro area, which was announced at 5.8%, significantly higher than the previous month. These announcements, however, are in a second-place as they relate to periods before the outbreak of war in Ukraine and it is now a given that things have changed.

The American stock markets had corrective trends but the corresponding European ones sank for good. Oil has risen sharply, reaching levels we have seen since mid-2008. Significant profits have also been made for gold, while Bitcoin and most cryptocurrencies have been stabilizing. All markets had significantly higher volatility than the average of recent months. Finally, we saw a significant de-escalation for bond yields with the US 10-year opening at 1.97% and closing below 1.74%.

This week the markets will be affected again by the developments in Ukraine but beyond that, there are two very important announcements. One concerns US inflation for February and the other concerns eurozone interest rates and monetary policy. In second place are the announcements of inflation in Germany, European and Japanese GDP, industrial production in the United Kingdom, and retail sales in Germany.

SP500

The US SP500 index closed last week at 4,370 points and losses of 1.40%. The index had opened with a gap last Monday and could not recover it and enter the positive territory, without, however, extending its losses. The war in Ukraine overshadows everything as the fears and worries it causes have not allowed the positive image presented by the American labor market to create a positive climate in the markets. The SP500 Volatility Index (VIX) has stabilized above 30 which means that the perception of the markets is that the index has a high probability, for a more than 2% fluctuation every day. Recall that the VIX had an average of 25 before the events in Ukraine and was well below 20 before the pandemic. This week’s futures have opened lower, as the war rages, the US is considering new sanctions, even unilaterally, and there does not seem to be a diplomatic window of relief at the moment. Below 4,210 points we may see even stronger correction while signs of recovery may be seen with an upward reaction above 4,420 points. We may try short positions this week.

DAX40

The German DAX40 index was strongly bearish last week, closing at 13,113 points, with losses of more than 10%. It was one of the most declining weeks in recent years since we have not seen such a correction since the beginning of the pandemic. Europe will certainly be hit hard by the war and the sanctions it has imposed on Russia, given that many European countries are energy-dependent on Russian natural gas. On the other hand, the unemployment rate in Germany fell to 5% in February, from 5.1% in January and the January trade balance was very positive and reached 10 billion euros but these results are almost ignored by the markets since the war has changed and will change economic conditions even more. The index futures opened this week in strong negative territory and as long as the picture does not change, the losses will probably widen so short positions is our selection for the current week.

FTSE100

The British FTSE100 index fell sharply last week, closing at 6,952 points and losing more than 7.50%. Fears of a continuation or escalation of the war in Ukraine and the impact on the economy have also shaken markets in the UK, with the index easily losing 7,000 points and a series of support levels. The financial calendar in the country does not have to contribute important announcements these days so there can be no breath of positive news from that side. There have been strong rumors of a new rate hike by the Bank of England but it remains to be seen whether this will be implemented based on new war data. The index opened this week with a new strong correction and is very close to the significant support of 6,735 points which is a low price of about 11 months. It takes more than 7,000 points to talk about recovery but this week we prefer short positions.

Gold

Last week was bullish for gold, closing at $ 1,973.7 and profiting more than 4.40%. This week, gold futures opened higher and even exceeded $ 2,000. Gold is favored in times of crisis, war, and anxiety but the period we are going through is a period of high inflation too so gold is favored even more. Not even the strong dollar, which has a negative correlation with gold (since it is denominated in dollars), was able to stop the upward momentum of prices. In addition to developments in Ukraine, the announcement of inflation in the US on Wednesday will play an important role, with analysts talking about a price close to 8%. If gold prices stabilize above $ 2,000, it makes sense for many investors and analysts to assume that the all-time high of $ 2,089 in August 2020 could be threatened. $ 1,976 is strong support that, if bent, could potentially lead to a further de-escalation of prices. We will try long positions for one more week.

US Oil

Last week was strongly bullish for oil with next month’s futures closing at $ 114.98, performing profits that exceeded 25%. Oil prices opened as high as $ 130 this week, prompting the U.S. thoughts to consider banning oil imports from Russia, even without the consent of allies. If this happens, it will hit supply in an already difficult oil market lately and could lead to a crisis in many sectors of the economy. The world’s largest oil companies (Shell, BP, etc.) are leaving Russia in the context of the sanctions that have been imposed and the generally negative climate that has been created for the Russian leadership. At the OPEC meeting on Wednesday, its members, ignoring the war in Ukraine, insist on the small increase in production they had announced for April, and this probably means that we will see price stabilization only through demand since OPEC does not seem to take actions. Prices have already reached the levels of summer 2008 and we’d better stay out this week because the oil price is out of control and very volatile.

EURUSD (Euro vs US Dollar)
The EURUSD closed significantly lower last week, opening at 1.1128 and closing at 1.0935, while the opening already had a significant downward gap, compared to the previous week’s close. The war in Ukraine and its effects on the eurozone economy are pushing the euro, while the US currency is strengthening as it is a safer investment option in times of high risk such as the one, we are experiencing. Eurozone inflation was announced at 5.8%, significantly higher than 5.1% in January. This would normally signal plans to raise interest rates and tighter monetary policy, but given the blows the European economy will receive from the war, it is doubtful whether these measures will eventually be taken. Retail sales in the euro area, which were announced at 7.8% for February, also decreased compared to expectations. Significantly strengthening the dollar is the fact that the US labor market has a strong image, but the main factor that judges the course and movements of the pair is the willingness of investors to take risks as it is shaped by war developments. EURUSD reached the levels of the spring of 2020 when there was another risk aversion, caused by the pandemic. In case of continuation of the downward movement, the supports that can hold it are at 1.0870, at 1.0780, and most importantly at 1.0635. In case of a change of the situation, a clear break of 1.10 is needed to have hopes for recovery. We’ll go with the trend by preferring sell positions this week.

GBPUSD (Great Britain Pound – US Dollar)

Last week was strongly bearish for the GBPUSD, which closed at 1.3233, having lost about 350 pips compared to the closing of the previous week. Most investors turned to the US dollar as a safer investment solution and this affected this pair too. There are indications that both the United States and the United Kingdom are going to raise interest rates soon. It remains to be seen whether these expectations will be met following the recent developments in the war in Ukraine. The financial calendar in the UK was relatively empty of major announcements and news and the same is going to happen next week, except for the industrial production announcement on Friday. Therefore, the developments of the war and the announcements in the United States, with the most important one being inflation, will judge the course of the pair. The price area of 1.3160 ​​is the most important obstacle to the continuation of the downtrend towards 1.30 and in case of a reverse trend, in the first phase, an upward break of 1.3470 is needed. We may try sell positions this week as well.

USDJPY (US Dollar – Japanese Yen)

The USDJPY moved lower last week, opening at 115.29 and closing at 114.78. The US dollar may have been strong, but Japan’s currency, which has a tradition of market preference in times of crisis, seems to be getting stronger as it is considered one of the safest investment havens. The large de-escalation of bond yields, which have a strong correlation with the pair, also played an important role. This yen profile surpassed Japan’s relatively negative announcements last week: industrial production was lower than expected and the unemployment rate rose slightly to 2.8%. Since the beginning of the year, the USDJPY cannot develop a specific trend and direction, showing an inability to fall below 113.50 and an inability to overcome the strong resistance at 116.35, a price that is a multi-year high. It is not ruled out that this image may continue or we may see new efforts to approach and exceed 116.35 so we may try buy positions this week.

EURJPY (Euro – Japanese Yen)
Last week was significantly bearish for the EURJPY, which closed at 125.52 while in the previous week it had closed above 130. The strengthening of the Japanese currency as an option in times of high risk and the great weakness of the euro as the eurozone is hit financially and energy from the war in Ukraine brought this result. This downward movement was on a weekly basis, one of the largest in recent years, as the fall approached 500 pips. The pair is very close to the significant support of 125 and to signal an upward reaction there must be at least in the first phase, an upward break of 127.40. We may try some low-risk buy positions this week.

EURGBP (Euro – Great Britain Pound)

Last week was bearish for the EURGBP which opened at 0.8348 and closed at 0.8257, having already started with a gap compared to the previous week. The UK looks set to be less economically dependent by the war than the rest of Europe, and if one takes into account the Bank of England’s more aggressive policy of raising interest rates compared to the ECB, the pound looks stronger against the euro. The pair broke the significant support at 0.8275 and reached price levels that we had to see since the summer of 2016. Under these circumstances, it is not ruled out that we will see a continuation of the downward movement, and only if there are positive developments on the war front or a change in the monetary policy of the eurozone, there can be a recovery. We will consider opening sell positions for one more week.

USDCAD (US Dollar – Canadian Dollar)

The previous week was slightly bullish for the USDCAD, which closed at 1.2726, just above the closing of the previous week. The US dollar was very strong but the Canadian dollar was strong too, due to the explosive rise in oil prices. Oil, which is Canada’s main export commodity, is strongly correlated with its currency. We also had very important news and announcements about the country’s economy last week. There has been a 0.25% rise in interest rates from the Bank of Canada and so the interest rate is now at 0.50%, above the US’s 0.25% currently. Also, Canada’s GDP grew in the last quarter of 2021 by 6.7% while industrial production in January increased by 3%. There is therefore strong evidence that Canada’s economy is on a strong growth trajectory. It is therefore possible that the pair will be pushed downwards with many sellers dreaming in the first phase of approaching the price levels of 1.25. Sell positions is our selection for the current week.

USDCHF (US Dollar – Swiss Franc)
The USDCHF had a downtrend last week, as the opening price was at 0.9259 and the closing price at 0.9169. The Swiss franc was able to outperform the strong US dollar for three main reasons. The first has to do with the profile of the Swiss currency which has the characteristics of a safe investment choice. The second reason is the sharp rise in gold prices. Gold is strongly associated with the Swiss currency. Finally, last Friday inflation in the country was announced at 2.2%, significantly higher than 1.6% of the previous month and so there are rumors that the Swiss bank could raise interest rates earlier. It remains to be seen whether these reasons that have had a positive effect on the Swiss franc have already been consumed by the market and whether there will be an upward reaction in the event of a continued rise of the dollar. We may try buy positions this week.

AUDUSD (Australian Dollar – US Dollar)

Last week was a strong uptrend for the AUDUSD which opened at 0.7169 and closed at 0.7373. The Australian currency has been strengthening significantly for the past 5 weeks as the country’s economy is relatively independent of Russia and of the countries that will be affected by the sanctions imposed on it. The sharp rise in commodity prices, especially metals and gold, has also had a positive effect on the Australian dollar. Last Tuesday there was a decision by the Bank of Australia on interest rates and monetary policy. Interest rates remained unchanged at 0.1% but statements by Australian banking officials point to interest rate hikes soon enough. Finally, the country’s GDP for the last quarter of 2021 increased by 3.4%, which indicates the upward trend of the Australian economy. Buyers of the pair dream of a multi-month high above 0.7550, but if concerns and fears about the war intensify and the US currency strengthens further, it is possible to see a downward trend to 0.71. By trusting more in the first case, we may open buy positions this week.

Bitcoin

Last week was slightly bullish for Bitcoin, which closed at $ 38,439 with profits close to 2%. Significant resistance near $ 45,000 was a strong deterrent to the further rise of the Bitcoin price on Tuesday and Wednesday and so there was a violent correction below $ 40,000 in the following days. There is still confusion about what will happen to the mining in Russia and the Russian cryptocurrency holders, with the CEO of the big exchange Kraken, stating that they do not intend to close the Russian accounts unless legally required. The fact is that Bitcoin does not meet the preferences of investors as a counterweight to the fears of war and inflationary pressures, in contrast to gold, which is close to its all-time highs. As long as the Bitcoin price is below $ 40,000, the odds are in favor of further correction with the next supports existing at $ 36,200 and $ 34,300. Only a stabilization above $ 45,000 can raise hopes for an uptrend. We may try short positions this week.

IMPORTANT DISCLAIMER

The information of this report is of a general nature only. It is not a personal financial advice. It does not take into account your objectives, financial situation and personal needs.

a-Quant is not responsible for your actions and recommends you contact a licensed financial advisor before acting on any information contained in this general information report.