Implications of Russia-Ukraine conflict

Key highlights

• The major development since our last publication has been a significant escalation in the Russia-Ukraine conflict
• Energy prices – and hard and soft commodity prices in general – are set to remain under upward pressure over the coming months. Global growth will likely be somewhat lower and inflation higher
• A wide range of oil price outcomes is possible, from USD95/barrel to USD150/barrel and above
• Gold will remain supported in the short term by haven flows and investors looking for inflation hedges, with a downward trend resuming only once the market environment allows central banks to pursue monetary policy normalisation
• European currencies that are dependent on energy imports and/or in close proximity to the conflict will remain vulnerable. This includes the euro, sterling, and Swedish krona in G10, and the Polish zloty, Hungarian forint, and Turkish lira in emerging markets. The US dollar will by default hold up better, aided by the US’s energy independence
• Over time, if broader risk sentiment stabilises, better support should materialise for those commodity currencies that are geopolitically distant from the conflict – such as the Canadian dollar and even the Australian dollar in G10, as well as LatAm currencies in emerging markets
• After the US dollar, the Swiss franc remains our second-favourite FX haven – given Switzerland’s strong external balance, limited dependence on fossil fuels and natural gas, and a greater tolerance from the Swiss National Bank of a stronger CHF. The Japanese yen would require a rally in US Treasuries to perform, and may lack some of the qualities of an optimal haven.

The major development since our last publication has been a significant escalation in the Russia-Ukraine conflict, with large-scale Russian military intervention extending deeper into Ukrainian territory. We have already seen significantly broader sanctions imposed in order to isolate Russia from access to financial markets; for now, though, Russian gas flows have continued to Europe. Energy prices are likely to remain higher given the supply shock, and we have made downward revisions to global growth forecasts (foremost for the eurozone) as well as upward revisions to inflation.