Highly changing scenario “From trading war to monetary restraint,” says ING on FX market. 

 

Financial markets have been whiplashed by Russian – Ukraine war, but surging inflation dynamics and the resultant centrals banks move to policy tightening will drive currency market, wrote Chris Turner, Global head of Markets at ING, in a note titled, “from trading war to trading monetary restraint.

 

Since Russia invaded Ukraine late in February, commodity prices have spiked on supply disruptions from the sanctions on Moscow by Western countries. In turn, that has pushed up inflation globally.

 

With runaway inflation a reality, major central banks were expected to shift to an aggressive monetary tightening policy to tame rising price pressures. The US Federal Reserve is predicted to lead the way, with expectations firming for more significant and faster rate hikes.

 

The dollar index (DXY), which measures the greenback’s performance against six of its peers, has risen to two-year highs this week, rising above the 100-level mark,

 

“In a week of IMF meetings, we have heard from quite a few central bank speakers, and the message from the likes of the Federal Reserve and the Bank of Canada is that the policy rate needs to be taken to neutral as quickly as possible. Even the Bank of England’s Catherine Mann hinted at the need for a quicker pace of tightening,” said Mr Turned.

 

“Do not try to fight the strong dollar bull trend, and the DXY can probably hold above 100,” said Mr Turner.

 

“What does this potential shift in focus mean for FX markets? The war in Ukraine and its implications for commodity prices had seen FX trade through the terms of trade lens – or winners and losers in the commodities war,” said ING’s global head.

 

“If we are to shift to a more difficult risk environment on the back of what we call involuntary tightening – where real yields go more deeply into positive territory – we could start to see some of the pro-risk commodity pairs hand back some of the war-inspired gains,” he added.