The War turned into financial tussle AND More....

1. The Bank of Japan after a very long time is now expected to increase its YCC 10 year yield target from 25bp to 50bp. This implies that we may start seeing further steeping in the curve and natural unwinding in the rates market of Japan.

2. The Russian invasion in Ukraine has put the forthcoming Central bank meetings even more crucial and added newer dimensions to the older hawkish stance. The flight to safety and inflation scare has led to oil trading above $110/barrel and US 10yr inching back to 1.7 levels.

3. Given the risk off sentiment, the dollar index has strengthened to above 97 levels, but the USDINR pair has shown strength due to strong FX reserves. RBI intervention is evident by the price movement. Selling dollars shall be a win win for RBI as the average dollar cost for RBI is at INR60 per dollar and thus they make handsome profits by intervening to maintain INR strength.

4. While the Russians attacked Ukrainian territory, the US has so far kept away from main street action and instead imposed strict financial sanctions on the Russian Central Bank. The sanctions freeze all the foreign assets held by the Central Bank, leaving it devoid of any power to stabilize its currency. Such sanctions are leading to manifold impact on the global liquidity and may spur a front end funding stress.

5. Russia seems to have envisaged this as we can see that Russia has been reducing its dollar and Euro assets over years to add gold and Yuan as major components of the FX reserves. But these sanctions may have counter effects on USD and EUR dominance in the global FX reserves as Central Banks may start adding gold/oil/something else as FX reserves.

6. Amidst the scare of further sanctions, buyers are unwilling to buy Russian oil/energy. This is reflected in the deep discount between Russian Oil and Oil benchmark (Brent) to the tune of $22/barrel. Given the supply shock, either we demand destruction of the supply pump up. If the US tries to cushion the oil supply, then surely next month we will see strong employment numbers and that could further put tightening pressure on the Fed.

7. Though the Russian branches of Russian banks are closed for operations and trading, the European subsidiaries are also finding it tough to stay afloat. The ECB in its recent statement indicated that it won't be able to bail out these banks. Banks will be unable to service their loans. Default expectations have shot up to 56%, which clearly implies that banks have problems redeeming savers deposits. This has in turn bought the National Deposit Insurance program to light.

8. Meanwhile, the Bank of Canada front ran the Fed by hiking its policy and overnight rate by 25bps. They cite higher inflation and ongoing unwinding as reasons for the decision. The bank had already reduced its bond buying program, and in fact will soon start QT.

9. The picture in the RUB IRS swaps also doesn’t look that great. March 21 was one of the busiest weeks in terms of issuance and now a mountain of annual coupons fall due this month end. The uncollateralized swaps with the received fixed rate warrant more closer risk management.

10. Interesting Charts