USDRUB climbs to 69

The Ruble is coming under punishment today as European Union Foreign Ministers meet in Brussels later this afternoon to discuss further economic sanctions on Russia following the recent escalation of tensions in Ukraine. The USDRUB has climbed as high as 69.2231 with traders pricing in the possibility that economic sanctions will be expanded. Even without further sanctions being confirmed, the economic outlook is so aggressively against the Russian economy that all signs point towards longer-term Ruble weakness. The current sanctions are already going to lead to an inevitable recession, with the economy certain to face further pressure following the plunge in the price of oil. Overall, what we are seeing today just provides another example why the Central Bank of Russia (CBR) faces such a difficult task preventing Ruble weakness.

After falling around 100 pips on Wednesday, the EURUSD has so far had a quiet day with the pair currently consolidating around 1.13. There are reports floating around that Greece will refuse the possibility of adding economic sanctions on Russia later today. Although these are currently just reports, it doing so would seemingly add strain on political relationships with other Eurozone partners at a time when stocks in Greece are already taking a beating. This could also weigh on market sentiment around Europe. Moving away from potential political risks hurting the Euro, the longer term outlook for the currency is still bleak.

The complete divergence in both economic sentiment and monetary policy between the ECB and US Federal Reserve is like entering a continually widening tunnel. The tunnel widened further following the ECB introducing QE and the constant signals that the Federal Reserve is going to raise US interest rates later this year are continually supporting the USD. As we approach the time when anticipation of a US interest rate nears, we would expect further demand for the USD to reaffirm the longer-term bearish outlook most people have on the EURUSD.

Following the complete shock from the Swiss National Bank (SNB) a fortnight ago, increased demand for Gold was noticed as investor’s sought safe-haven assets. This period has come to a conclusion this week, with Gold already declining by over $30 to $1263. Although the reality is sinking in now that the Federal Reserve will not be raising US interest rates as early as the March/April timeframe that some were wishfully thinking, optimism is still high that the Federal Reserve will raise rates later this year. The overnight FOMC minutes indicated this will be the case, with September a likely timeframe in my opinion. There are some downside risks with inflation expectations, but the Fed remaining unconcerned over the price of oil suggests to me that, as consumers continue to benefit from higher disposable income, inflation expectations will rise again.

Ahead of next week’s interest rate decision from the Australia, anticipation is rising that the Reserve Bank of Australia (RBA) will become the latest central bank to unexpectedly ease monetary policy. This rising anticipation has also been the main driver behind the Aussie falling to a fresh five-year low at 0.7775 today. Why might the RBA cut rates? The weaker than expected inflation data a week ago has been the main catalyst behind the increased expectations. After all the central bank surprises we have witnessed recently, a rate cut can’t be completed ruled out although I don’t personally think it will cut interest rates quite so soon. In my opinion, what the RBA might do is wait to see what the real impact of weaker commodity prices will be for the Australian economy, before possibly reducing rates later this year.

The Aussie was not the only major currency to reach a milestone low overnight, with the Kiwi also falling to a near five-year low at 0.7264. Following the Reserve Bank of New Zealand (RBNZ) leaving interest rates unchanged overnight, the closing monetary policy statement basically suggested to traders that there will be no interest rate hikes anytime soon. After raising interest rates on three consecutive occasions during the middle of last year, the “pause” in normalising monetary policy appears to have become a lengthy delay. Although the OPEC decision not to cut oil production in November confirmed a longer-term bearish outlook for oil, nobody envisaged where oil prices might end up. This has added unexpected deflation risks to the New Zealand economy and encouraged a shift in commitment from the RBNZ.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

Follow Jameel on Twitter @Jameel_FXTM

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