The first week of March will be another busy one for investors.  Russia’s invasion of Ukraine continues to rock the financial markets with currencies and equities extending their losses. It is impossible to judge how far Russian President Putin will go in his attempt to overthrow Ukraine’s democratically elected government.  A large military convoy stretching over 17 miles has moved to the perimeter of Kyiv in preparation for a more intensive attack.  The Russian economy will be hit hard by economic sanctions, the plunging ruble and all the steps taken by other countries to freeze Russia out of the financial system.  Worries about consequences for the global economy is one of the main reasons for the broad based decline in bond yields and sell-off in global equities.

While prices across the globe are expected to rise because of Russia’s invasion, the recent decline in bond yields tell us that investors expect central bankers to be less aggressive with policy normalization.  The conflict is between Russia and the Ukraine but every country is feeling a threat to its own national security.  There’s a lot of uncertainty right now and that could make central bankers more conservative.  This week we’ll get better sense of how policymakers view the impact of the Russian-Ukraine conflict starting with tonight’s Reserve Bank of Australia monetary policy announcement and followed by the Bank of Canada meeting and Federal Reserve Chairman Powell’s testimony to Congress on Wednesday.

The RBA could stay tight lipped. They are not expected to change monetary policy and while a rate hike could happen sometime this year with the recent uncertainty, they may choose to keep their outlook unchanged until the outlook clears.  The Bank of Canada on the other hand is expected to raise interest rates.  Earlier this month, the market was pricing in 70% chance of a half point hike but now those odds have dropped to 20%. A quarter point hike is a done deal and if they opt for the smaller move, USD/CAD could jump back above 1.2750.  However if they look past the conflict and cite the need to get ahead of intensifying price pressures, USD/CAD should test 1.26.

The main focus will be on Fed Chair Powell. The central bank made it clear that rates are rising in March but the Russian invasion complicates the outlook.  The war on Ukraine won’t change the Fed’s plans to hike in two weeks time because inflation is running at its highest rate in four decades but it may slow their tightening cycle. The big question tomorrow is what Powell will say about the economic implications of the invasion.  If he focuses on high prices and the need to get ahead of it, the U.S. dollar should trade higher on the premise that the tightening cycle will proceed as planned.  However, if the expresses any material concern about the economic disruption, Treasury yields could fall further, dragging the greenback lower. Chances are, Powell will confirm that rates will need to rise but also say that it is still too soon to tell how the war will affect the economy. 

In this busy week, the Russian invasion of Ukraine will dominate headlines and determine currency flows but aside from that, the top 5 events to watch will be the Reserve Bank of Australia monetary policy announcement, the Bank of Canada’s rate decision, Fed Chairman Powell’s testimony, US non-farm payrolls and Eurozone CPI.  We’ll also have our eye on Chinese PMIs, US ISM along with fourth quarter GDP reports from Australia and Canada.