Market Drivers for February 27, 2014

Russia-Ukraine tensions escalate causing flows in CHF

Australian Caoex well below expectations

Nikkei -.32% Europe -.66%

Oil $102/bbl

Gold $1326/oz.

Europe and Asia:

AU Private Capital Expenditure -5.2% vs. 1.0%

EUR CPI 0.6% vs. 0.6%

R GE Unemployment -14K vs. -10K

North America:

USD Durable Goods 8:30 AM

USD Weekly Jobless Claims 8:30 AM

USD Yellen testimony 10:00 AM

Risk aversion clearly hit the forex market at the start of European trade today after tensions between Russian and Ukraine escalated sparking rallies in the Japanese yen and the Swiss franc.

The situation in Ukraine remains precarious after Russia announced full scale military games and pro-Russian protesters seized the regional parliament building in the Crimea. Ukraine has issued a stern warning to the Russian envoy that it will view any incursion into Ukrainian territory as an act of aggression.

The growing tensions spilled over into FX with USD/JPY dropping through the 102.00 support level while EUR/CHF dipped to within a few pips of the key 1.2150 support. If the conflict escalates and Ukraine begins to move closer to civil war, the risk aversion will accelerate and are likely to expand to other asset markets such as equities. Although for now it appears unlikely that Russia will seek a military solution to the conflict, events in Ukraine are moving rapidly and as is often the case in geo-political flare ups remain highly fluid with very little clarity as to final resolution of events.

On the economic front the data out of Australia shocked to the downside as Private Capital Expenditure – a key measure of investment dropped by a whopping -5.2% versus -1.0% eyed The news sent Aussie tumbling to a low of 8902 as traders began to worry that the RBA after just recently shifting towards neutrality mave have to move back to accommodation if growth Down Under deteriorates.

The sharp contraction in investment suggests that the Australian mining sector is clearly in retrenchment and some banks such as Citi have already started to lower their GDP estimates for 2014. Meanwhile the Aussie is likely to remain in offred mode especially against the kiwi with the AUD/NZD cross having broken the key 1.0700 support line.

In Europe the string of cooler than expected German CPI readings and the continuing conflict in Ukraine put fresh pressure on the unit. The pair dropped below the 1.3650 level but remained relatively steady by mid-morning London dealing and it remains to be seen whether the ECB will make any moves at the next governing council meeting. Overnight the German unemployment data beat expectations once again printing at -14K vs -10K eyed indicating that Europe’s largest economy continues to generate jobs at an improved pace for the third straight month in a row. That may be the key reason for why ECB policymakers will remain stationary for the time being.

In North American trade all focus with turn to Janet Yellen whose weather delayed testimony to Senate will be heavily scrutinized for any possible shift in tone from her remarks to the House two weeks ago. Traders will be keen to hear whether Ms. Yellin will remain on track with the QE taper or whether she may hint that the Fed will be open to maintaining the stimulus longer in order to help US economy to recover from the recent weather woes. Any suggestion of delay in the taper could send the dollar plunging against the yen with pair possibly testing the 101.00 level in response to such a move.

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