Anxiety surrounding the potential for escalation of the conflict between Russian and Ukraine left investors trimming exposure to emerging markets and high-yielding asset classes yesterday, with financial markets experiencing a bona-fide “risk-off” trading session. Although the domestic economic releases of personal consumption and income in the US showed encouraging developments over the month of January, the S&P was unable to generate any positive momentum, finishing down by 0.74% as political barbs continue to be traded between the United States and Russia. Energy prices have skyrocketed with the ever increasing Russian presence in the Crimea region of Ukraine, with estimates that should Russia decide to cut-off natural gas supplies to Ukraine, the region only has a stockpile to last four months. In addition, Ukraine relies on Russia for about 30 percent of its global trade, and at a time when the troubled nation is seeking financial assistance from the IMF to cover its near-term debt obligations, decreased trade or sanctions with Russia could be extremely detrimental to Ukraine’s economy. While it is clear the situation has not past the point of no-return from a political standpoint, investors are none-the-less nervous when drawing up potential conclusions to the row, sending the cash VIX contract up to 16% at the close of yesterday’s North American session.
The week chalked full of Central Bank meetings kicked off overnight with the Reserve Bank of Australia announcement, and as expected the central bank left rates unchanged at 2.5%. The Aussie initially dropped on the release of the statement, as traders reduced their exposure to the Antipodean currency after the RBA referenced the exchange rate remained high by historical standards, a passage left out of the February statement. So while the central bank reiterated that the easing cycle had come to an end for the time being, the jawboning to try and talk the Aussie lowered worked initially as AUDUSD fell into the low 0.89s, but managed to claw back those overnight losses to trade back in the mid-0.89s as the Asian session transitioned over to Europe.
The busy week for the Aussie doesn’t end here, with traders only getting a short break before Q4 GDP statistics are released. Expectations are that the economy grew by a pace of 0.7% over the fourth quarter, coming in with an annualized y/o/y print of 2.5%, a moderately faster clip than what was witnessed in Q3. Corporations that are naturally long-AUD might want to think about using any Aussie strength on stronger than expected growth figures to offload some near term exposure, looking to leg into contract around the 0.9000 level where strong resistance for the pair is sure to lie.
As we get ready for the open in North American, the reduction of safety premia built up over the last few days is unwinding, with S&P future erasing all losses from yesterday as Russian President Vladimir Putin just finished up a press conference aimed at reducing East-West tensions over a war in Ukraine. Putin assured the world there was no need for Russia to use military force in the Crimea region of Ukraine, and that the use of force would be a last resort. In addition, Putin also said that Russia is not considering the annexation of Crimea, but that Russia reserves all right to use legitimate means to protect its residents of Eastern Ukraine. Also helping ease investor worries, Putin ordered the troops involved in the military exercise in western Russia back to their bases, explaining that the exercise had been planned long ago and had nothing to do with the coup in Ukraine.
The toned down rhetoric from Putin has helped calm investor nerves this morning, with capital flowing back into high-yield asset classes as market participants bank on a smooth ending to the Eastern European conflict. The Japanese Yen is on weaker ground as the USDJPY pair moves north closer to the 102 handle, while front-month WTI sheds over 1% to change hands south of $104/barrel. Emerging market currencies are stronger across the board, with the Russian Ruble and Ukrainian Hryvnia leading the charge up over 1% and 6% respectively, while the spillover effects of a potentially calmer Europe push EURUSD into the high-1.37s. As we write, US Secretary of State John Kerry is landing in Kiev for talks with the Ukrainian government about preparing a $1bn aid package for the region, something Ukraine desperately needs as it has come to light the country is approximately $1.5bn behind on its payment for Russian gas. While the sentiment is very pro-cooperation at this point, there is still room for progress to deteriorate, as we’re hearing the State Department is still planning on going ahead with sanctions against Russia in the coming days, something Putin is sure to not take kindly.
Looking ahead to tomorrow, Loonie traders are going to be intently focused on the Bank of Canada rate statement at10:00EST. The impending interest rate statement won’t be accompanied by a press conference from Governor Poloz, so traders will have to parse the statement for changes in language in regards to clues on the future direction of interest rates. While the headline data over the past few weeks has been encouraging for Canadian policy makers and the economy in general, the incoming data points will most likely fail to be sufficient for Poloz to alter the language used for the last statement, continuing to reference downside risks to inflation and that the bank will remain data dependent as to the timing and direction of the next change to the policy rate. The most recent inflation data will most likely make Poloz slightly more comfortable the risks of deflation are abating, however the green-shoots are too few and far between to go back to the moderately hawkish tone we saw with Mark Carney at the helm of the BoC. Although the GDP figures released last week were better than expected in regards to some aspects, the main contributors to economic growth where consumer expenditures and a build in inventories, not necessarily the most robust statistics when gauging the underlying health of an economy. That being said, with both CPI and GDP beating analysts’ estimates recently, the market has been positioning for the BoC to potentially be a bit more hawkish for their meeting on Wednesday, so we feel the underlying risks for the Loonie are skewed to the downside if the BoC decides to keep the wording in the press release unchanged.
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