Russia's CBR Attacks First

 |  Includes: FXA, FXB, FXC, FXE, FXF, FXY, NZDS, UDN, UUP
by: Dean Popplewell

Geopolitical Russia-Ukraine tensions are naturally weighing on market sentiment. However, it's rhetoric that is keeping everything in modest check for the time being despite the situation escalating progressively throughout the weekend. Behind the scenes talking is taking some of the capital markets' nervous edge off Putin's "bully boy" tactics thus far. President Obama has held extended direct conversations with the Russian leader himself over the weekend, whilst also securing commitment from the G7 in a joint condemnation of Russian violation of Ukrainian sovereignty. Putin obviously needs to defend his actions and has held talks with Europe, specifically Germany's Merkel, defending his intention regarding the troop movements but also agreeing to an OSCE-led "fact-finding" mission. Throughout all of this it's only natural that the USD, CHF and JPY be in demand during a crisis. Other safe haven flows have given a boost to the bund, the gilt and US Treasuries futures, as well as gold – however, the appetite for all out risk aversion remains cautious for the moment.

A good example is the 18-member single currency itself. Despite the escalation of tensions in Ukraine, the EUR continues to show resilience and at current levels (€1.3775) does not seem to be so vulnerable to general risk aversion, with its regional safe haven status somewhat reinforced. The currency pair remains confined to a 200-tick range between €1.3650-1.3850. Aside from political upheaval, the currency is to be tested ahead of this Thursday's ECB rate meeting. Many believe that after last week's CPI data the chance of any ECB action is much diminished. At the moment it would seem that aside from the risk aversion situation in Ukraine, an ECB rate move is the main barrier to a higher EUR.

Russia's Central Bank has been active and more aggressive than Putin so far. The CBR unexpectedly raised interest rates by +150bps this morning in an attempt obviously to support the "Motherland's" plummeting RUB. It's been rumored that they have sold $10b to support their currency. Policy makers have indicated that it’s only a "temporary" decision – however, a knock-on negative effect is expected to at least pose further problems to Russia's wilting economic growth. Depending on the current political outcome, the "downside risks for fixed investment growth and potential economic sanctions could push Russia into recession."

A disappointing and somewhat conflicting set of manufacturing data from China this weekend raises a few concerns about growth and not just domestic growth from the world's second largest economy. February manufacturing PMI was just above consensus, but still fell to a new 8-month low, and HSBC final manufacturing PMI was in line at 48.5. The pleasant surprise was non-manufacturing PMI, printing a 3-month high (55). Most investors have been concentrating on the yuan, especially after last week's slump guided by the PBoC's intervention efforts. The central bank has been aggressive of late, intervening to push their currency lower. Policy makers are trying to shake out the speculators and curb the relentless inflows. The yuan has risen more than +30% since the 2005 revaluation. Many expect the Chinese government to widen the daily trading band (perhaps at next week's NPC meetings) to permit gains or losses to +1.5% or +2% from today's +1% level.

ECB's Draghi continues to look at data points and today's eurozone manufacturing numbers were stronger last month that first thought. The euro's Markit manufacturing PMI fell to 53.2 from 54 – higher than the preliminary reading (53) and more importantly, still in expansion territory. The details were also encouraging with new-orders rising for an eight consecutive month and manufacturing jobs also on the rise. Signs of continued expansion should please euro policy makers – perhaps a "no" rate decision on Thursday got a little easier to make. That will probably depend on inflationary pressures. This morning's report again showed that price pressures eased in February, with businesses reporting that prices paid fell for the first time in six months. However, last week's inflation data should edge the ECB's thinking and keep them in the non-proactive rate camp a wee bit longer.

The UK is "hot" – February data this morning revealed that the UK's manufacturing sector expanded at the fastest pace in three years and this despite the horrible weather conditions that the country has been exposed to since December. UK Markit manufacturing PMI rose to 56.9 from 56.6 in January. Just more proof for Governor Carney that the UK economy should be expecting another quarter of robust economic activity. The BoE is the still the widely tipped amongst the developed countries to be the first central bank to hike rates, even ahead of the Fed. Despite strong domestic demand being behind most of this morning's report, an uptick in orders from export markets should eventually filter through. Carney and company will continue to concentrate on the UK economy's "spare capacity" issues (the BoE's reason for no rate change) – there will be "no" rate hike until the slack has been taken care of.

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