Euro Pinned Down By Threat Of New Sanctions
2022.04.05 13:03
- Europe considers new sanctions against Moscow after atrocities
- Euro under pressure, oil prices recover despite China lockdowns
- Aussie shoots up after RBA, tech shares lead Wall Street higher
Russian embargo?
The prospect of another round of economic sanctions against Moscow is back on the table following reports of atrocities against civilians in Ukraine. The US Treasury has already made its move – cutting off the Russian government from using its ‘frozen’ US dollar reserves for making coupon payments on bonds.
This means Moscow must now drain the foreign currency revenue it earns from exports to make coupon payments or make them in rubles, which would correspond to a technical default. Either way, the aim is to cripple the war effort. The ball is now in Europe’s court, with pressure growing to impose a total energy embargo.
Economically speaking, this is the ‘nuclear option’ as a sudden ban on energy products could inflict more damage on the European economy than on the Russian one. It is therefore unlikely to happen, but nevertheless, the mere discussion was enough to breathe life back into oil prices and deal another blow to the euro.
Euro and oil outlook
It’s difficult to be optimistic about the euro these days. Hopes for an imminent peace deal have been squashed by the alleged war crimes, the economy is flirting with a recession, and the ECB’s hands are tied by surging inflation.
Even the French election seems like an asymmetric risk. A victory for President Macron is already the market’s baseline scenario, so the euro is unlikely to benefit much. In contrast, a victory for far-right forces could come as a shock and introduce an element of political risk for the single currency.
Elsewhere, oil prices have been enjoying the show, rising on hopes for an embargo on Russian energy and the inability of negotiators to seal the Iran deal. The striking part is that traders seem entirely preoccupied with the supply side of the equation, paying little attention to the expanding lockdowns in China that threaten to dampen demand.
Aussie and stocks climb
The Reserve Bank of Australia injected new life into the aussie today after it dropped its reference to being ‘patient’ and essentially opened the door for a rate increase soon. Policymakers were careful to highlight that wage growth remains muted, counterbalancing some of the optimism around the broader economy.
Market pricing was already hawkish and didn’t change much after the meeting, with investors still betting on eight quarter-point rate hikes for this year. Whether the RBA will be able to deliver on all that will depend on the path for China, where the situation is worsening with covid cases spiking but the government sticking to its zero tolerance policy.
In equity markets, the tech complex spearheaded another powerful rally, with Twitter (NYSE:TWTR) (+27%) leading the charge after Elon Musk announced he had taken a 9.2% stake in the company. That lifted sentiment across financial markets, perhaps because of the signaling effect that the world’s wealthiest person is not afraid to make heavy investments in this unstable environment.
The real show will begin next week when the earnings season kicks off with the big banks. Investors will be looking at the damage from the sanctions and rising energy costs to gauge the fallout on economic growth and corporate earnings. As for today, the spotlight will fall on the ISM services survey and a speech by the Fed’s de facto Vice Chair, Lael Brainard. 
