Is the Impact of Crimea Over on FX?

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Market Drivers for March 17 2014

Little market reaction to Crimea vote so far


Nikkei -0.35% Europe 0.22%

Oil $98/bbl

Gold $1381/oz.

Europe and Asia:

NZD Westpac Consumer Sentiment 121.7 vs. 120.1
NZD PSI 53.1 vs. 58.1

North America:

USD Empire Manufacturing 8:30 AM
USD Capacity Utilization 9:15
USD NAHB Housing index
CAD Foreign Securities Purchases

USD Business Inventories 10:00 AM

The currency markets saw little reaction to the Crimean referendum as trading started for the week and indeed risk assets rallied as the night wore on as investors became convinced that any diplomatic fallout over the Ukraine crisis is likely to be muted.

On Sunday Crimea voted to formally join Russia with 96% of the vote in favor of the referendum. European and US officials immediately denounced the vote and noted that they would not recognize Crimea which they view as an extra territorial grab by Vladimir Putin. EU and US officials are now working on a series of sanctions against Russia to voice their disapproval of the recent events, but markets appear to have shrugged off their worries as consensus view now believes that the sanctions will be diplomatic rather than economic in nature and will only have minor impact on Russia’s trade with the rest of the world.

As a result EUR/JPY which gapped lower to 140.80 at the start of Asian trade has managed to climb to 141.60 as risk sentiment improved in European markets. Nevertheless, despite the relief rally, the situation in Ukraine remains tense and the prospect of Russian incursion into east Ukraine remains high. So far Russian troops have remained contained to the Crimean territory, but the rhetoric from Moscow suggests that Russia reserves the right to intervene into eastern Ukraine if it feels that Russian speaking residents there are threatened.

In short the crisis in Ukraine may have simply paused as Mr. Putin consolidates his grip on the Crimea region and considers his options for the rest of the Ukraine. It is clear that Mr. Putin true intention is not to act as long term occupier but rather to sabotage the nascent government in Kiev and to install another Moscow friendly regime in Ukraine. Yet his actions may have only emboldened the opposition and are likely to create further enmity between Ukraine and Russia.

In the meantime the war of words between Russia and the West remains in full force as both sides have ramped up their rhetoric regarding the events in Ukraine. Furthermore there is always the risk that hostilities in east Ukraine could turn violent providing a perfect excuse for Russia to intervene which would elevate the conflict to another level and will likely spark a massive wave of risk aversion in the financial markets. For now however, the markets have assumed that the military actions are over and that the conflict in Ukraine will move to the diplomatic phase.

Meanwhile on the economic front the calendar is relatively sparse with only the Empire Manufacturing, Capacity Utilization and NAHB housing on the docket – all second tier data that is unlikely to have much impact on trade. All eyes this week will focus on the FOMC meeting with key question for investors being whether Fed officials will consider any slowdown in taper given the heightened geopolitical tensions of late. The answer is likely to be no, as US economic data has remained surprisingly robust and will likely keep the Fed on the taper schedule for the foreseeable future. As to today, the price action could continue to consolidate as traders keep one wary eye on Ukraine.

Boris Schlossberg
Managing Director

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