Cryptocurrency in uncharted waters as Russian incursion weighs heavy 

The relationship between geopolitical crises and market outcomes is not as simple as it seems.

Historically, foreign conflicts in the developing world have had minimal to no impact on developed economies such as the United States. Depending on how said conflict develops in Ukraine, there may not be any long-lasting shocks that withhold markets from a full recovery. 

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What makes current geopolitical events so significant—or rephrased, why there is so much volatility—can be traced back to inflation rates not seen since the Second World War.

The stark parallels include inflation driven by fiscal stimulus gains ground, money printing, controlling the bond market, and promoting domestic financial market stability through a low-interest-rate environment.

But, what is the bottom line?

Should this war between Ukraine and Russia not escalate past the point of economic sanctions, markets will likely continue reacting to policy from the US Fed (Federal Reserve). 

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However, the growing concerns of market participants are justifiable.

Specifically, the prevailing 'soup' of inflation fears looks to be caused by the highly corrosive effect surging upside price pressure has on the fixed value of bonds.

With bond mutual funds seeing monthly outflows in the ballpark of US$120 billion and a 25-basis point hike to interest rates all but certain next month—with potential for a 50-basis point hike—volatility is more than likely to continue rising. 

During periods of extraordinary bond outflows, the Fed has traditionally responded by either not raising interest rates or started repurchasing bonds—an unlikely scenario given actual inflation. 

This begs the prudent to question.

So, where has the money flow been going recently?

Analysis of order flows suggests liquidity is certainly not headed towards cryptocurrency or the stock market at present. 

Although, circumstances may yet change for cryptocurrency. 

The likelihood of this scenario increases if the US-led sanctions force refugees, citizens, and perhaps some institutions to hasten their adoption of cryptocurrency.

All eyes await the next move from President Biden, who considers cutting Moscow from the SWIFT payments system, effectively causing mass disruption to domestic financial systems. 

Notably, XAU (Gold) and XAG (Silver) have outperformed every other asset class over the previous trading week. The geopolitical conflict between Ukraine and Russia appears to have spurred their respective rallies.

Given this conflict continues over the coming weeks, pullbacks in the two trading pairs—XAU/USD and XAG/USD—are technically essential to the long forecasts below.