As uncertainty grips the world from various facets to include geopolitical tension, climate risks and exacerbating inflation as an autopsy of the COVID19 pandemic, the one thing that is taking a cue from all this, is the United States Dollar (USD). Benchmarked against a basket of (6) major currencies, the dollar index (DXY) has rallied to a 21 month high, a few points shy of the pandemic historical highs of 102.4 seen in 2020. The period is experiencing stronger asset sell – off pressure with more capital flight channeling liquidity to safer haven assets such the greenback and gold.
Before the Russia – Ukrainian war, focus was on Jerome Powell’s monetary policy stance in view of ballooning inflation in the US. Fed hikes were the biggest fear that emerging markets fretted over and the war has just worsened that position as wider global metrics have been and are yet to be impacted.
For emerging and frontier market currencies, this is not so good news as a stronger dollar by default weakens their local units. EM economies could have to worry about the economics of energy as crude flirts with highs of $118 a barrel which adds to cost-push pressures as global food prices remain elevated.
The biggest threat to energy pricing still gravitates around Russia’s retaliation to the sanctions that continue to isolate the eastern bloc giant. Russia is the second largest producer of crude and key member of the OPEC+ which makes discussions about crude rather very interesting when the time comes. For net exporters of crude, a great opportunity to balance fiscal positions just presented itself but for net importers manufacturing and mining costs will bear the brunt of increased costs.
For other key commodities such as copper, the Russia – Ukraine war is fretting markets with fears of supply chain disruptions that sent red metal prices to all-time highs on Friday. On the London Metal Exchange (LME) copper geared up to $10,460 a metric ton as warehouses emptied out.
Markets wait to see the implication on monetary policy given the sudden shift in global posture weighing in on upside risks to inflation, currency hurdles and the need to stimulate growth post a ravaging pandemic.
The Kwacha Arbitrageur
