Most of the G10 currencies that have performed worst since the start of the invasion of Ukraine by Russia on 24th February were the best performers yesterday as renewed optimism for a diplomatic solution allowed risk flows to dominate the financial markets. For example, USD/RUB is now back close to the level that prevailed on 24th February. However, economists at MUFG Bank note that we should be cautious over how developments unfold from here.

Fundamental backdrop for the USD is not consistent with a sustained sell-off from here

“When the dominant flow is only the conversion of energy revenues into rouble, RUB upward pressure is inevitable.”

“Crucially, the talks in Turkey did not secure a ceasefire and the Russian negotiator reiterated that de-escalation did not mean ceasefire. So whether the reversal of the invasion-fuelled financial market moves are sustained remains tenuous indeed.” 

“The main impact for the financial markets is through the sanctions action and in that regard while this may be a positive sign of moving in the right direction we remain some distance away from any of the current sanctions being reversed.”

“We are somewhat sceptical over the FX moves yesterday prompted by the Russian statements of a de-escalation and see a risk of some pull-back over the coming days if there is no follow-through on the ground. In any case, the fundamental backdrop for the US dollar is not consistent with a sustained sell-off from here.”