Month: April 2022

The Russian rouble was 3% stronger against the U.S dollar at 70 level, and 1% higher to Euro at 75 on Friday morning, supported by upcoming income tax payments, coupled with the Central Bank of Russia’s rate cut of 3%, and at a time when Russia halted gas supplies to Poland and Bulgaria.

USD/RUB pair, Daily chart

The rouble has not only fully recovered to levels seen before February 24, 2022, when Russia launched a “special military operation” in Ukraine that prompted unprecedented Western sanctions, including a freeze on Russia’s reserves, but it has also surpassed pre-pandemic levels.

The Russian currency was initially pressured to record lows after Putin ordered the invasion of Ukraine, but it managed to fully recover after Central Bank ordered some capital controls at a time Russian exports exceeding imports.

Income tax payments:

Rouble extends recent advances against the world’s two reserve currencies, the Euro and the US dollar, reaching its highest level since early March 2020, owing to the anticipation of forthcoming month-end income tax payments, which have resulted in greater foreign currency conversion into roubles.

For example, Russian export-oriented enterprises have been selling their foreign exchange earnings to cover local liabilities that could total more than 3 trillion roubles or approx. $41 billion worth this month alone.

CBR cut rates by 3%:

In the face of increasing inflation which have surpassed the 20%, from 9% in January 2022, and 8% in 2021, the Central Bank of Russia (CBR) cut its benchmark interest rate by 300 basis points to 14% today for the second time this month, with analysts expecting it could fall to 10% by year-end.

The CBR raised its key interest rate to 20% in late February in an emergency move after the invasion of Ukraine, before trimmed it to 17% in early April.

The annual rate of inflation in Russia has jumped to the highest since 1999, as the prices of a wide range of certain products have moved sharply higher following the limited supplies after the imposition of Western sanctions.

Russia halts gas supplies to Poland and Bulgaria:

The rouble has risen in value in recent weeks because of Russian President Vladimir Putin’s demand that potential buyers to deposit euros or dollars in a Swiss account at Gazprombank, which must then convert the funds into roubles, deposit the proceeds in another account owned by the foreign buyer, and send the payment in Russian currency to Gazprom.

As a result, Russia halted gas supplies to Poland and Bulgaria on Wednesday after they rejected to comply with Moscow’s proposed mechanism to pay in roubles, with Putin saying that other countries refusing to pay for gas in roubles could face the same outcome.

The new rouble-focused payment strategy was created in reaction to broad Western economic sanctions imposed on Russia, with the European Commission accusing Moscow of blackmail over its payment demands.

Following the strengthening of the US dollar against the Euro, the EUR/USD pair continues to fall towards a two-year low of $1,07, supported by the aggressively hawkish stance of the Federal Reserve, soaring US bond yields, safe-haven demand, and robust US economic growth at a time when global growth is slowing.

EUR/USD pair, Daily chart

The risk-sensitive Euro is showing signs of weakening because of the Ukraine conflict, the mounting dangers of stagnation and stagflation in the Eurozone, and the ECB’s dovish posture.

The DXY-U.S. dollar index, which tracks the greenback against a basket of six major currencies (the euro accounts for 60% of DXY), hit a new high of 102 on April 26, the highest since March 25, 2020, and ahead of the pandemic-panic highs of 103 set in 2020.

EUR/USD bearish momentum:

Amid weaker Euro dynamics, investors turned bearish on the EUR/USD pair, while the bullish macroeconomics of the US economy, the hawkish Federal Reserve, geopolitical concerns, and monetary policy divergence between the Federal Reserve and the European Central Bank continue to point to a higher dollar.

As numerous policymakers have set a more hawkish tone, the Federal Reserve is expected to continue to roll out rate hikes at upcoming meetings in its quest to get a handle on soaring inflation, supporting the rally in the 10-year U.S. Treasury yields towards the 3% level last week.

As a result, the EUR/USD remains vulnerable to downside threats, with Covid-led 2020 lows of $1,063 being eyed, particularly considering the Federal Reserve’s potential for more aggressive policy tightening.

Weaker Euro on dovish ECB and Ukraine war:

Euro fell to a two-year low of 1,07 to the dollar on Tuesday morning, as the Ukraine war, the energy crisis, and the dovish European Central Bank all threatened the Eurozone’s economic prospects.

The European Central Bank is set to lower its growth forecast for the Eurozone further, citing fears about the effect from Russia’s invasion of Ukraine, while major European equity indices are losing ground.

Since the sanctions on Russian raw materials mostly hurt the Eurozone’s economic activities rather than other economies across the world, the Euro remains stuck in the developments of the Russia-Ukraine war.

Following the Russian Armed Forces’ atrocities against people in Bucha, Ukraine, the European Union has agreed to ban coal imports from Russia, marking the first time that sanctions have targeted Russia’s vital energy income.

Because European manufacturing and construction industries rely substantially on Russian commodities imports, any indication of escalation would have a negative impact on the euro, worsening the outlook for the Eurozone economy and raising fears of stagnation and stagflation.

Since Q4, 2021, when Russia began increasing its troops on Ukraine’s borders, the Eurozone has been grappling with rising oil and natural gas prices, record-high electricity costs, and soaring industrial metal prices, posing a significant threat to the continent’s commodities-dependent economies and the much-needed euro.

The U.S dollar and bond yields have continued to rise in anticipation of the Federal Reserve tightening monetary policy at a time when rising inflation and Russian aggression harmed the global economic growth outlook.

Following concerns regarding a likely downturn in the global economy due to the war in Ukraine, investors have flocked to the safety of the dollar and U.S. Treasuries, which have long been considered safe havens during times of political and economic turmoil.

The DXY dollar index surged as high as 101 this week, with bullish momentum and outperformance by the US economy indicating more advances toward the 2020 pandemic-panic highs of a 103.

In the bond market, yields on the benchmark 10-year U.S. Treasury note have risen to near 2,90 percent, their highest level since December 2018, boosted by the Federal Reserve’s intention to raise interest rates.

Since the Ukraine war, energy uncertainties, and the dovish European Central Bank have posed a threat to the Eurozone’s economic outlook, while the Euro has traded near a 2-year low of 1,07 to the dollar.

The Japanese yen has also experienced significant losses in recent weeks, falling to a 20-year low against the dollar, owing to discrepancies in bond yields between the US and Japan, as well as the Bank of Japan’s dovish stance.