What the Upcoming Crimea Referendum Means For FX

Posted on

Market Drivers for March 14 2014

Concern over Crimea continues to haunt markets but FX follow through is limited

UK Trade Balance

Nikkei -3.30% Europe -0.60%

Oil $98/bbl

Gold $130/oz.

Europe and Asia:

JPY Industrial Production 3.8% vs. 4.0%
EUR CPI 0.5% vs. 0.5%
GBP UK Trade Balance

North America:

USD U o M 9:55 AM
USD Business Inventories 10:00 AM

Financial markets remained in turmoil over the upcoming referendum on Crimea’s secession from Ukraine this weekend, but currency markets saw remarkably little follow through in further risk off trades with most majors trading near their New York close levels. The Nikkei was down by -3.3% but USD/JPY remained above 101.50 for most of the night, dipping only when Chinese officials suggested that the GDP in Q1 may be as low as 7%.

Overall, the yen pairs appeared to have absorbed most of the selling in yesterday’s New York trade and have spent most of the Asian and European sessions consolidating their losses. The situation in Crimea remains tense and Ukraine’s acting President has called up 60,000 reserves in the National guard, warning that a Russian invasion may come at “any moment”, but so far the hostilities have been contained.

Indeed if the referendum for secession does pass as expected on Sunday, but Russian troops make no further encroachment in Ukraine’s territory then market sentiment may improve. At this point the turnover of Crimea to Russia appears to be a foregone conclusion and the only factor that could ratchet geo-political tensions would be a Russian military invasion of east Ukraine which would no doubt create a massive diplomatic conflict and send financial markets into another selling frenzy.

However, it appears doubtful that Mr. Putin would risk a full on military conflict at this time. Russia is already in the throes of an economic slowdown that could tip the country into a vicious recession if the West terminated all economic relations with the country as a result of its military adventures. Mr, Putin’s move into Crimea was always about maintaining Russia’s access to warm water ports and for now he seems to be concentrating on achieving that specific goal.

Therefore, if events on Sunday unfold strictly through political means without any further military intervention, the markets may view this development with relief and milk risk on rally could occur as shorts cover their positions and traders turn their attention to economic rather geo-political concerns.

As to economic matters the calendar remained very light in European session with only German CPI and UK Trade Balance data on the docket. UK Trade Balance was wider than expected printing at -9.8B versus -8.8B eyed with Trade Balance with EU deteriorating further to -5.8B from -4.7B the period prior. Cable came off by 10 points on the news as the data confirmed that the high exchange rate is clearly having some negative impact on trade. That is likely to keep BoE on the sidelines longer before considering the prospect of raising rates.

The EUR/USD meanwhile held up relatively well finding support at 1.3850 before rebounding to 1.3885 by mid morning London dealing. Yesterday’s comments by Mario Draghi created a massive sentiment turn in the pair as ECB chief voiced concern over the strength of the exchange rate. It is no surprise that Mr. Draghi’s remarks came at the time when the EUR/USD was approaching the key 1.4000 level and the pair now is likely to face much stiffer resistance if it tries to make another run at that barrier. Still unless the ECB commits to some specific easing policy measures, the EUR/USD may remain relatively firm for the time being.

Boris Schlossberg
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *