The situation in Russia and Ukraine has fermented beyond expectations, and the military action seems to have developed into a tug-of-war. With Western sanctions on Russia, especially restricting some Russian banks from using the Society for Worldwide Interbank Financial Communication (SWIFT) international settlement system, and imposing “restrictive measures” on the Russian central bank, this has caused nervousness in the global financial system.
All this will test not only the Russian central bank, but also global central banks, financial institutions and all financial market participants. Compared with the beginning of January, the exchange rate of the Russian ruble once morest the US dollar has depreciated by more than 50%.
Ulrich Leuchtmann, chief foreign exchange and commodity research director at Commerzbank, told Yicai.com, “The decision of the West to freeze the Russian central bank’s foreign exchange reserves means that some of the assets that make up the ruble have been restricted. Due to financial and foreign trade Sanctions may significantly reduce the purchasing power of the ruble, so it is not surprising that the ruble will depreciate, and the Russian central bank can only make a desperate attempt to control capital flows.” Securities sell order.
In addition to the Russian central bank, the pressure on European and American central banks is also not small. If the situation in Ukraine continues to heat up, the prospects of the consumer market will face huge challenges. At present, the market still believes that the Fed will raise interest rates by at least 100 basis points (BP) this year. If the international oil price exceeds US$125/barrel, what will happen to consumer demand? The possibility that the Federal Reserve is regarding to shrink its balance sheet and slow U.S. economic growth is rising, which will lead to double pressure on financial markets.
Global markets have begun to brace for heightened volatility. “Under the military conflict, the liquidity of the US dollar in the offshore market has significantly tightened, and the swap points have soared abnormally. Everyone is asking for US dollars. Last week, the US dollar index once more tested the high point in the past four months.” A foreign exchange trader of a major state-owned bank said reporter said. It is worth mentioning that the volatility index (i.e., the fear index, VIX) has been above 30% since the beginning of 2022, and it has been the same time for the whole year of 2021.
Russia’s central bank faces big test
As the central bank of a major country, the test faced by the Russian central bank affects the global financial market. Western allies’ decision on Saturday to block some Russian banks from accessing the SWIFT payment system will deal a heavy blow to the Russian economy but also pain to their own companies and banks.
SWIFT, a secure messaging system used to ensure fast cross-border payments, has become the primary mechanism for providing financial services to international trade. Russian banks denied access to SWIFT will find it more difficult to communicate with their international counterparts, which will slow trade and make transaction costs higher. Earlier, the United States announced sanctions on a handful of banks, including Sberbank and VTB, directly targeting the vast majority of the roughly $46 billion worth of daily foreign exchange transactions by Russian financial institutions. It is nearly 80% of all Russian banking assets.
The decision to exclude some banks from the SWIFT system might encourage “nesting”, in which Russian entities turn to sanction-free banks and large multinationals in hopes of entering SWIFT, one expert said. But this workaround will create compliance challenges for global banks.
The top priority of the Russian central bank is to ease panic and avoid the collapse of the ruble. The U.S. dollar once morest the ruble was reported at around 74 in early January, and it soared to a peak of 117.8 on February 28, a depreciation rate of nearly 50%. “Since Western sanctions may limit the use of Russia’s more than $630 billion in international reserves, the central bank can only control capital flows. Foreigners cannot sell securities until further notice. The Russian central bank is clearly trying to stem the sell-off in the Russian securities market and The ruble plummeted. The downside of these measures is also obvious, that investors usually don’t forget the shock very quickly, which means that all foreigners considering investing in Russian securities in the future will have to consider this tail risk.” Chertmont told reporters.
In addition, the Central Bank of Russia announced on February 28 that it would raise the benchmark interest rate to 20%, saying that the purpose of raising interest rates is to offset the increased risk of ruble depreciation and inflation. Russian central bank governor Elvira Nabiullina said at a press conference following the rate hike that the central bank will be flexible to use any necessary tools, the Russian banking industry has turned to a structural liquidity deficit, and banks will be able to To raise sufficient funds from the central bank, “We have taken a series of measures to allow banks not to increase their provisions during the year. These measures are equivalent to increasing bank capital by 900 billion rubles.”
“In general, the Russian economy is not overly dependent on foreign capital, as long as it generates a large export surplus. But the problem is that this export is only available if it generates accounts receivable that the country can use for future imports. Meaning. From an economic standpoint, the more risk these receivables are exposed to, the less meaningful it is to export. This is one reason why Russia might reduce gas exports,” Reichertmont said.
Global central banks and financial markets brace for volatility
It is clearly difficult for countries to be alone. Deutsche Bank analyst George Saravelos wrote in a note to clients that financial markets will reflect heightened risks to energy supply, eroding investors’ willingness to buy risky assets and potentially weighing on the euro.
“There may be some deterioration in money market funding conditions this week due to the uncertain impact of the asset freeze on global liquidity. The European Central Bank, the Federal Reserve and other central banks are expected to step in and provide strong support if necessary,” he said. The ruble and other European emerging market currencies may come under pressure.
Zhao Yaoting, a global market strategist at Invesco Asia Pacific, told reporters that because the Russian central bank is subject to foreign exchange sanctions, unless the Russian authorities completely cut off energy supplies to Europe, Russian banks will continue to have access to the global banking system.
It cannot be ignored that the fermentation of the geopolitical situation coincides with the time when the Fed is preparing to withdraw from monetary easing, which will inevitably lead to a double blow to the market. At present, Goldman Sachs expects the Fed to raise interest rates seven times in 2022 starting in March, while Morgan Stanley expects to raise interest rates six times during the year. The Fed has not yet announced a quantitative tightening (QT) roadmap. Morgan Stanley believes that a specific roadmap may be released at the FOMC meeting in June, and then QT will begin soon, and it is expected to shrink the balance sheet every month. The scale will be controlled at 80 billion US dollars (of which US debt is 50 billion US dollars and MBS is 30 billion US dollars).
“We believe that the possibility that the Fed’s imminent tightening of monetary policy will cause a slowdown in U.S. economic growth is rising.” Eric Robertsen, global chief strategist at Standard Chartered, told reporters that the market’s current interest rate hike path expected by the Fed has not been lost. confidence. In fact, the current spread between the 2-year Treasury yield and the federal funds target rate has widened to its widest level since August 2004. The US will announce February CPI data on March 10, and the Fed will hold an interest rate meeting six days later. “We expect the Fed to focus on inflation risks rather than rising economic downside risks. But in our view, the current 5 The one-year U.S. Treasury bond yield is at 1.86%, and the market’s expectation of a cumulative rate hike by the Fed by around 200BP before June 2023 is too high.”
At present, US stocks have fallen back to the new lows set in late January. The Nasdaq and S&P 500 have fallen as much as 14.2% and 10.5% in 2022, respectively, but the bears are still ready to move. The period of time the fear index (VIX) has been above 30% since the beginning of 2022 has been comparable to the period in which this has been the case throughout 2021.
U.S. dollar index and renminbi rise
At present, the panic in the market has been reflected in the sharp tightening of the US dollar liquidity in the offshore market, and the nervousness of traders has rapidly increased.
“Today, the banking industry is waiting and watching, and they are afraid to trade easily. The overseas swap points between the US dollar and the renminbi have soared, which is mainly reflected in the lack of overseas US dollars. The soaring of this swap point has led to abnormal swap valuations, and traders’ mentality has collapsed. ” the foreign exchange trader of the above-mentioned bank told reporters.
Supported by risk aversion, the US dollar index rose rapidly. As of 20:30 on February 28, Beijing time, the U.S. dollar index was approaching the 97 mark, reaching the intraday high of 97.74 at the end of June 2020, closing at 96.570 last Friday, up 0.49% for the week.
But on the other hand, the renminbi is also soaring once morest the dollar, with the onshore spot rate approaching the 6.3 mark. The Financial Market Department of CCB stated that despite the strong performance of the US dollar index, the RMB continued to strengthen under the support of foreign exchange settlement demand. The intraday high reached 6.3100, the highest since April 2018, and closed at 6.3142 last Friday, with a cumulative appreciation of 0.19% for the week. . The CFETS RMB exchange rate index rose to 104.19, a new high since the data was available.
Foreign exchange traders interviewed by reporters believe that compared with the expected tightening in the United States, the inflow of real money under the current account and under the capital account is still the main reason for supporting the RMB. Even under geopolitical fluctuations, the RMB is expected to remain strong.
Zhu Yanhua, a foreign exchange business expert from the International Business Department of the Bank of Communications, told Yicai.com: “As the domestic dollar deposits exceeded 1 trillion, the domestic market’s response to the soaring yields on short-term dollar bonds was still indifferent, and the domestic dollar interest rate remained unchanged, resulting in the spread between domestic and foreign prices. It quickly inverted and fell into the negative range, forming a short-term short-term squeeze on the RMB and challenging the previous 6.3. In the final analysis, the reason for this phenomenon is still due to the flooding of the US dollar and the extraordinary performance of China’s trade. “
In addition to the strong inflow of funds under trade, the Chinese bond market will still see a large inflow of funds, which will support the RMB exchange rate. Liu Jie, head of China’s macro strategy at Standard Chartered, told reporters that due to the increasingly prominent “safe haven” effect of renminbi assets, global central banks and international investors will continue to increase their holdings in the Chinese bond market. ~800 billion RMB or so, comparable to 2021. Return to Sohu, see more
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