Russia’s invasion into Ukraine placed central banks in a difficult position at the end of February as intensifying inflation pressures were weighed against the uncertain geopolitical outlook.
The geopolitical events put European currencies under significant pressure and led to broader flows into safe-haven currencies like the US dollar and Swiss Franc. This resulted in a larger forecast error for our eurozone periphery currencies, however many of our USD calls remained accurate due to the marginal bullish adjustment in our USD forecasts at the start of the year.
US rates stabilised following a substantial upward shift in yields in January. Meanwhile, we expected volatility to persist above last year’s average as adjustments in rates markets continued. Amid such a volatile environment, we forecasted relatively flat near-term mean values for some currencies, such as EURUSD, because their upside and downside risks were roughly balanced. This decision benefited a number of our EUR forecasts. February’s results didn’t fully capture the pinnacle of FX volatility over the last weeks, as the initial sanctions on Russia that kicked off the stark risk-off tone in markets were only imposed at the beginning of March.
Many of our near-term G10 forecasts performed well in February, with notable performances in EURCHF, EURSEK, AUDUSD, and USDCAD. The 6- to 12-month forecasts ranked well for USDCHF and EURSEK, despite the heightened volatility over the last year. The hawkish repricing of ECB policy expectations aided many of our EUR rankings, most notably in EURSEK and EURCHF as the Riksbank and Swiss National Bank remained near the dovish end of the spectrum.
Within emerging markets, our front-end calls for USDZAR and USDMXN ranked well following the stabilisation of US Treasury yields, while both our 3M and 12M forecasts for EURRUB ranked among the top four despite the heightened geopolitical and sanctions risks. Given the recent shift in RUB dynamics, our near-term view on the ruble has turned substantially more bearish, with our forecasts sitting well above the 100-handle for the next six months.
Simon Harvey, Head of FX Analysis
Ima Sammani, FX Market Analyst
Jay Zhao-Murray, FX Market Analyst