The Complex Environment Ahead: Geo-Politics, NFP Friday, and Volatility

 The Complex Environment Ahead: Geo-Politics, NFP Friday, and Volatility

The Complex Environment Ahead: Geo-Politics, NFP Friday, and Volatility.

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The year ahead is shaping up to be  inflationary and in turn a high interest rate environment. Adding to the inflation, interest rate narrative, is the brewing geopolitical risks with the possibility of  Russia – Ukraine invasion and over the weekend North Korea firing it biggest ballistic missile since 2017.

This is a shaping up to be an environment of give and take with likely frequent risk-on, risk-off trading days. This would suggest moves into safe haven instruments such as gold (XAUUSD), Japanese Yen (JPY) during period of risk-off sentiment and higher risk instruments such as Emerging Market currencies as the South African Rand (USDZAR) and the Mexican Peso (USDMXN) during periods of risk-on sentiments.

A good guide to understand the turn of the markets during these times will be to keep an eye on the Volatility Index (VIX) which measures the level of volatility in the market.

Adding to the complexity of the environment will be possible capital flow from trades between gold and higher interest yield instruments (bonds and currencies through interest rate differentials) as global central banks are increasing interest rates in response to higher inflation. Gold, being a non-interest paying instrument tends to perform poorly in higher interest rate environments, however it tends to outperform during times of increased geopolitical tensions.

 With increased geopolitical tension between Russia and Ukraine, Oil supply is perceived to be likely under pressure in particular the European markets as Russia threatens to cut supply should NATO Allies act decisively against Russian actions toward Ukraine. This will likely put additional upward pressure on the liquid commodity which is currently trading at levels last seen in 2014, which traded as high as $88.13 (OIL_Crude) per barrel at the time of going to print. As global economies continue to open-up with the receding Covid-19 cases, increased vaccinations and less lethal variants, travel is perceived to increase which will bring further demand for the commodity.

The US Fed signaled a March 2022 interest rate hike, backed with a hawkish tone form the Fed Chair Jerome Powell at last weeks FOMC meeting, the USD reacted with Bullish momentum which has since been sustained gaining as much as 1.38% against the Eur (EURUSD). The South African Reserve Bank Governor Lesetja Kganyago on Thursday 27th Jan announced a 25bps interest hike following the SARB MPC meeting. This was inline with market expectation as the SARB looks to contain inflation locally within the target range of 3 – 6%. This further sustains the higher interest rate environment in which markets are likely to trade in 2022.

End of the week is the all-important US Non-Farm Payroll data announcement, Friday 4 February. Also, on Friday is the Canadian Non-Farm Payroll data announcement. Inflationary data print in these important data points could possibly see bullish moves in the USD and CAD respectively.

Disclaimer: the publication of analysis is a marketing communication and does not constitute investment advice or research. Its content represents the general views of our experts and does not consider individual readers’ personal circumstances, investment experience or current financial situation. Analysis is not prepared in accordance with legal requirements promoting independent investment research and Exness is not subject to any prohibition on dealing before the release of analysis. Readers should consider the possibility that they might incur losses. Exness is not liable for any losses incurred due to the use of analysis.

Terence Hove

Terence Hove, a Financial Markets Analyst with multi-asset brokerage firm Exness completed his BBusSci: Economics at Monash University. With over 8 year experience within financial service his expertise is well developed in financial markets analytics and trading. Exness is an industry leader that provides reliable online trading in financial markets. Exness offers professional services on the above-mentioned assets, please follow the link to learn more on the offering

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