perspectives d’investissement
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.
With both Russia and Ukraine significant producers of commodities, the ongoing conflict may result in supply disruptions and higher commodity prices. While a significant disruption to Russian supply of natural gas has so far been averted, the situation remains fluid. In oil markets, investors are weighing the potential impact of further disruptions and/or sanctions on Russian supply. This comes at a time when inventories are low and spare production capacities stretched. We see a wide range of possible price outcomes this year (see Commodity corner – full pdf on right-hand side of page). Ukraine is also a systemically important producer of a number of agricultural commodities, including wheat and corn, and of industrial commodities and alloys (like aluminium), which suggests upside risks to inflation.
Second, while the immediate currency market response to Russia’s invasion has been clouded by position adjustment and risk reduction, once risk sentiment stabilises – as we assume it will at some point – we believe that there will be greater divergence in currency reactions. European currencies dependent on energy imports and/or in close proximity to the conflict will remain vulnerable. This includes the euro (EUR), sterling (GBP), and the Swedish krona (SEK) among G10 currencies, and the Polish zloty (PLN), Hungarian forint (HUF), and Turkish lira (TRY), in emerging markets. The US dollar (USD) should hold up better, aided by the US’s energy independence. Assuming broader risk sentiment stabilises, commodity currencies geopolitically distant from the conflict may outperform. This includes the Canadian dollar (CAD) and Australian dollar (AUD) in G10, and the Chilean peso (CLP), Peruvian sol (PEN), Brazilian real (BRL), Indonesian rupiah (IDR), and Malaysian ringgit (MYR) in EM. The Chinese renminbi (RMB) should remain stable and track the broader US dollar.
Third, we believe the currencies of Central and Eastern Europe, the Middle East and Africa will retain their status of ‘most vulnerable’ given recent developments. Having already downgraded the Russian rouble to ’cautious’, we further downgrade the currency to EMFX underperformer. We also downgrade the PLN by one notch, to ‘cautious’. Recent sanctions aimed at preventing Russia’s central bank from accessing FX reserves will increase the risk of default, and prevent the country from protecting the currency. Further outflows are likely by both foreign investors and Russian residents, and this should keep the rouble under depreciation pressure against the US dollar. With the exception of the Israeli shekel (ILS) and South African rand (ZAR), all other currencies will face weakening pressures in view of their high dependence on energy prices, proximity to the conflict (PLN and HUF), as well as potential loss of tourism (TRY; see CEEMEA section).
Finally, our preferred haven currencies remain the USD, CHF, and JPY – in that order. We believe a still-robust trade surplus as well as a small dependence on fossil fuels and natural gas in Switzerland (under 3% of total energy consumption) will ensure the franc remains very well supported. On the other hand, a much smaller trade surplus and dependence on fossil fuels and natural gas (near 70% of total energy imports) will prevent the JPY from functioning effectively as a haven currency. We expect the EUR to fall below parity versus the CHF in 2022.
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