Fear Of Ukraine Crisis Becomes The Forex Driver

Includes: CYB, FXE, FXY, UDN, UUP
by: Ralph Shell


Trading markets during the time of a global political crisis requires very careful analysis.

Near term emotion may over rule longer term outlook.

How this might affect the future value of the Japanese yen.

It has been obvious for several weeks that Putin and his unmarked army are going to remain in the Crimea. The feeble threats from the political class in the West means little to Putin. It seems he intends, by force, to bring back parts of the empire to Mother Russia. Does anyone think the Sunday vote in Crimea will oppose the Russian take over?

Markets, as well as politicians, seemed prepared to accept the takeover of Crimea as an accomplished fact, but there is another threat. It is reported there are 80K of Russian troops, 270 tanks, 380 artillery plus additional Russian instruments of war being deployed on the eastern Ukrainian border. This new threat may be forcing EU politicos to unite and seek an appropriate response to Putin. And finally, German Chancellor Merkel is also coming to the table, warning Putin that Russia faces the wrath of EU sanctions.

Russian markets too have continued their sell-off as the tension mounts.

The Micex Index (INDEXCF) sank 2 percent to 1,248.56, the weakest close since May 2010. The yield on 10-year government bonds rose seven basis points to 9.41 percent, while Russia's ruble weakened 0.1 percent to 42.9445 against Bank Rossii's target basket of dollars and euros.

It is doubtful this concerns Putin. It is not his money and a small price to pay to expand the empire.

Earlier in the trading session, poor economic data from China continued to make markets uneasy and set the tone for a negative day. The flight to safety intensified as the day progressed. Equities in both Europe and the US sold off. Thursday weakness is usually followed by more of the same on Friday unless there is reason to think the Ukrainian situation is about to be resolved.

The flight to safety produced the usual results. The yield on the US 10 year dropped 9 BP to 2.64%, but the yield on the 10 year and Britain and Germany were also down, 6 and 5 BP respectively. Again the Japanese yen attracted some buyers. The USD was worth 102.80 yen early on, but then slipped to about 101.50.

Part of the yen strength may be Asian buying, a reaction to the weaker Chinese currency. Should the yuan remain under pressure, this yen buying may continue. Longer term we favor a lower yen, so we should probably consider this sell off is a buying opportunity.

There is a problem, however, picking out a number and placing the order. As we mentioned earlier, weak markets on Thursday, when driven by political events, often result in lower markets on Friday. Should the crisis not be resolved, the mayhem will then continue in the following week. In a political crisis, you trade emotion, not supply and demand fundamentals.

A short position in the yen (USDJPY, FXY, UUD, UDN) has further risk. The COT reports tell us the speculators are huge shorts, last reported to be about 110K contracts. Since the yen made a low of 105 versus the USD at the end of December this pair has been in a trading range. Longer term we think there is a possibility the yen weakens to 110 versus the USD, but short term there is a possibility existing bears will cover and take the pair back to the 95/96 area.

This may be more a question of timing rather than price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.