Another spike in the dollar FRA-OIS spread (an indicator of credit and liquidity risk in the interbank market) suggests that stress mounts in the dollar funding market. And although it is far from the levels of the spring 2020, the demand for dollars is growing because of this. Today's Payrolls report may also strengthen the dollar's positions. European currencies are under increasing pressure as the resolution of the Ukrainian crisis drags on.

Most of the factors point to a strong dollar

Conditions in short-term funding markets continue to develop in favor of the dollar. Investors leave for the weekend with minimal understanding of how the Ukrainian crisis will end, as reports of clashes increase. Market liquidity has eased this week, a trend reinforced by reports that Europe's largest nuclear reactor in Ukraine came under fire. An indicator of credit risk in the money market and the cost of short-term dollar borrowing, the 3-month OIS-FRA spread jumped to 29 points, the highest since May 2020. At the height of the lockdowns, in the spring of 2020, this spread reached 80 points. Not that it causes concern among market participants, but there is a signal to buy the dollar.

The position of the Fed also contributes to revaluation of the dollar. Fed chief Jeremy Powell spoke this week, where he made it clear that the 25 bp rate hike at the upcoming March meeting secured. Despite risk-off due to the conflict in Ukraine, inflationary expectations due to high oil prices are picking up, with markets expecting six rate hikes by the end of 2022. A strong Payrolls report will solidify these expectations, and given the market sentiment on the dollar, could be the catalyst for a new rally. The consensus assumes an increase of 400,000 jobs, and a lot of attention will be paid to the dynamics of wages. Wages above 5.7% yoy will no doubt add to the case for an even stronger dollar, as it will signal a growing imbalance in the economic outlook for the EU and the US, and that the positive yield outlook will also be centered on the latter's side.

Today, a meeting of the G7 participants is also scheduled, new sanctions against the Russian Federation are expected, although hard to imagine what could be else. The main speculation now is around a possible restriction of energy supplies from the Russian Federation, although the measure is very risky for those who will take it, since in this case it will be necessary to think about how to respond to a new round of rally of energy prices.

The dollar and currencies that are locally insulated from the conflict in Ukraine (in terms of trade links with parties to the conflict) and that export energy are expected to rise further. From this point of view, EURCAD short looks attractive with the target at 1.3850, where a technical rebound from a strong support level should be expected:

AUD and NZD, in turn, are also good for the short term, besides, positive surprises for them can be expected after the announcement of Chinese “growth initiatives” today and tomorrow.

EURUSD broke quite aggressively 1.10 and even rushed to 1.09, as the market comes to realize that the economic consequences of the sanctions against the Russian Federation and the response will significantly affect the European economy. A rebound can be expected in the technical support zone at 1.08: