Is Nuclear Blackmail The Last Option?
It is not easy to imagine a more ill-omened mix of headlines confronting Asian investors as they grab their first cup of coffee this morning. As a massive tech rout fought for space above the fold with news that Moscow cut gas flows to Poland and Bulgaria while Sergei Lavrov warned of the threat of nuclear war.
Cutting gas flows is not new news, but it's the timing of Russia plugging the gas flows when stagflationary fears are running rampant again. I would expect more dominoes to fall throughout Europe and for Russia to continue to shut down the supply to those refusing to pay in rubles for Russian gas and those providing substantial support to the Ukrainian resistance effort. Like how UK Boris Johnson is now Public Enemy No 1 among Kremlin supporters.
And while Russia cutting off gas supplies to Europe would cheat Brussels of a sanctions weapon, it would also go a long way toward depleting whatever is left of Moscow's leverage. Once Putin cuts off the gas flows, there is not much left except nuclear blackmail.
Combined with the trepidation of more lockdowns in China and everything that entails for a global economy trying desperately to sidestep the stagflationary event horizon, it undercut risk sentiment dramatically on Wall Street. US tech shares fell 4% Tuesday, in one of the worst sessions of a lousy year.
OIL
Oil is supported via the escalation of geopolitical tensions with Russia starting to cut off EU gas supplies. And this is just the beginning, so oil could remain supported as the EU pulls the plug on gas supplies in a domino effect across the continent.
And, of course, the offset is China lockdowns and everting that entails with the oil market desperately trying to skirt those recession storm clouds building on the horizon.
GOLD
Gold has found a bid due to the ratcheting up of geopolitical tensions; still, bullion is currently playing a secondary role to the US dollar, which is capturing the lion's share of safe-haven flows.
The sharp selloff in equities has also weighed on gold as stocks are typically used as a source of liquidity to buy gold.
ASIA FX
USDCNH turned bid after yesterday's fix was interpreted as slowing the selloff rather than drawing a line in the sand.
The consolidation in CNH below 6.60 may also relate to the upcoming Bank of Japan decision, given that CNHJPY at 20.00 appears to have been a trigger for CNH's weakness. While no change is expected from the BoJ, event weight has built significantly, which could be due to fears of a shift in YCC or expectations that unchanged policy would lead to a further leg higher for USDJPY.
The 1w risk reversal has turned sharply bid for USD puts since it rolled over the date, so protection is being sought against USDJPY longs if the BoJ tightens or delivers a hawkish message.
THB
USDTHB took another leg higher, reaching 34.29, the highest level since May 2017. Factors weighing on the pair continue to be monetary policy divergence, no sign of reprieve from China's lockdown policies weighing on tourism, along with seasonal factors such as dividend flows that last through May
It does not appear China will adjust the current covid policy soon, which means the local Tourism industry might write off 2022 for Chinese tourists, usually 1/3 of the county's visitors. So long as the structural tourism drag persists it negatively affects THB's current account forecast.
The lack of Bank of Thailand pushback suggests they do not mind the weaker THB from a competitive devaluation perspective. So long as the Yuan continues to weaken, we could see USDTHB grind higher.
MYR
Similarly, I expect the MYR to trade very defensively given the protracted lockdown in China and the worsening economic contagion effect that could spread through China proxies. With the Yuan weakening, I would not expect the BNM to try to defend the Ringgit.
Wait till Russia launches their real nukes. Then things will really get messy!