FX Markets Tell Central Banks' "Go Hard Or Go Home,": ING

The trades in foreign exchange markets point to an aggressive Federal Reserve as the primary driver, and the Russia-Ukraine conflict is further hurting the currency listed on the other side of the dollar exchange.

While central banks have tried to defend their currencies from the fallout of the Ukraine war, moves in the FX market suggest central banks need to keep pace with the US Fed to maintain stability in their currencies stable.

"'Go Hard or Go Home' is the FX market's message to central bankers trying to protect their currencies in the face of an energy price shock," said Chris Turner, Global Head of Markets at ING.

"In practice, this means that unless central bankers deliver aggressive monetary tightening to somehow insulate against a Fed policy rate at 3 per cent, local currencies will continue to lose ground against the $," he added.

Spiralling inflation is a reality and no more a threat, exacerbated by the Ukraine conflict, as commodities have risen sharply.

Indeed, since Russia invaded Ukraine on February 24, global crude prices have jumped, with the international benchmark Brent futures hitting a multi-decade high of nearly $140 a barrel last month. 

While crude costs have eased from those highs, with benchmark futures contracts falling for a second straight week, International oil prices have remained above $100 per barrel since Moscow attacked Ukraine.

The Reserve Bank of India has reluctantly shifted its focus toward inflation after repeated messages in recent weeks that the policy outlook was growth supportive.

While inflation is the primary driver, the other reason is the record weekly fall in foreign exchange reserves by nearly $12 billion for the fourth straight week, according to the latest report.

That dip in reserves is because of the rupee weakness and the RBI's intervention.