Geopolitical events are overshadowing a light economic calendar ahead of the weekend. The shooting down of the Malaysian plane over Ukraine and Israel's launch of a ground assault in Gaza dominate the focus. After a strong response that saw US 10-year yields fall to 2.44% and the dollar fall to nearly JPY101.00, the markets are consolidating, though equities have weakened further today, though the S&P 500 has stabilized.
A UN Security Council session will be held today, and investors will be cautious ahead of the weekend, where both geopolitical situations remain fluid. In addition, the self-imposed deadline for an agreement on Iran's nuclear development is over the weekend, with no deal in hand. Given the geopolitical developments elsewhere, there will likely be pressure to extend the deadline. Indeed, the isolation of Russia over Ukraine may make an Iranian deal even more difficult to achieve. That said, geopolitics often wane in influence after the initial adjustment.
The heavier tone of the yen, the firmer Australian and New Zealand dollars are consistent with this, and we note that the Russian ruble is up about 0.3% today. It is still off roughly 2.3% on the week. Russian stocks have shed another 1.4% today to bring the loss on the week to 5.2%, which puts MICEX back at late May levels.
EU foreign ministers will meet Tuesday to discuss the developments in Ukraine. This is all the more reason the failure of EU officials to agree on a foreign commissioner earlier this week as it had intended, is a tragedy. Various media reports claim this is the biggest US-Russian confrontation since the Cold War, but surely the EU should be spearheading the effort. In fact, it seems that the asymmetrical response, as evident throughout the crisis and again with this week's sanctions, shows clear reluctance to jeopardize commercial ties to support Kiev. This can only serve to embolden Putin.
The poor US housing starts data yesterday had already softened US Treasury yields, and the geopolitical developments drove yields down further. The yen strengthened, but we continue to read reports that misconstrue the safe haven appeal. The gains in the yen did not seem to be a function of investors fleeing political uncertainty by shifting savings into Japan. Rather, we think that what happens is the risk assets are undermined, and the yen's use as a funding currency is unwound (short-covering).
The euro recorded 6-month lows against the yen earlier today to about JPY136.70, before recovering to JPY137.30. It is losing some momentum in the European morning in front of resistance pegged near JPY137.50. For its part, the dollar came within spitting distance of the bottom of its JPY101-JPY103 trading range. Immediate resistance is seen in the JPY101.50-60 area.
The euro approached the bottom of its 2-cent range near $1.35, making a marginal new low after yesterday's $1.3517 low. A move above $1.3540 is needed to lift the tone. Otherwise, there may be another effort to trigger the stops that have likely been stacked below $1.35. Sterling continues to consolidate within the range set on Tuesday in response to the upside surprise on CPI. That range, $1.7060-$1.7190, is likely to continue to confine the price action over the next few sessions.
The dollar-bloc currencies are trading with a firmer bias. The Australian dollar is the strongest as a crack appears in the effort to talk the Aussie down. That effort has been led by the central bank, but Treasurer Hockey expressed greater confidence in the economy and warned against overreacting to the Australian dollar's strength. Meanwhile, although the Reserve Bank of New Zealand is expected to hike rates next week, a pause is expected afterward and participants have turned a bit more cautious.
Outside of US consumer confidence and leading economic indicators, typically not market movers, the main economic report ahead of the weekend is Canada's June CPI report. Unchanged headline and core rates of 2.3% and 1.7%, respectively, will likely keep the Canadian dollar in a consolidative mode after the US dollar ran out of steam near CAD1.08. Support is seen near CAD1.0720.
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