FX Markets Suggest Central Banks To ‘Go Hard Or Go Home’, Says ING
Trading in the foreign exchange markets points to an aggressive Federal Reserve as the primary driver, and the Russia-Ukraine conflict is hurting further damage to a currency listed on the other side of the dollar exchange.
While central banks have tried to protect their currencies from the fallout of the Ukraine war, moves in the forex market suggest that central banks need to keep pace with the US Fed to maintain stability in their currencies.
“‘Go hard or go home’ is the FX market’s message to central bankers trying to protect their currencies in the face of energy price shocks,” said Chris Turner, Global Head of Markets at ING.
“In practice, this means that unless central bankers somehow give aggressive monetary tightening to protect the 3 percent against the Fed policy rate, local currencies will continue to lose ground against the $,” he said.
Rising inflation is a reality and no longer a threat, exacerbated by the Ukraine conflict, as commodities rose sharply.
Indeed, since Russia invaded Ukraine on February 24, global crude oil prices have soared, with international benchmark Brent futures hitting a multi-decade high of nearly $140 a barrel last month.
While crude oil prices have eased from those highs, international oil prices have remained above $100 a barrel since Moscow invaded Ukraine, with benchmark futures contracts falling for the second week in a row.
The Reserve Bank of India has reluctantly shifted its focus to inflation in recent weeks after repeatedly conveying that the policy outlook was growth supportive.
While inflation is the primary driver, the second reason is a record weekly decline of nearly $12 billion in foreign exchange reserves for the fourth consecutive week, according to the latest report.
The fall in reserves has been due to the weakness of the rupee and the intervention of the RBI.