Global FX: Russia's Key Rate Hike

EUR/USD
In the first half of the session EUR/USD was weighed upon by a stronger USD amid a flight to quality with an escalation of tensions in the Ukraine after the Russian parliament voted unanimously to authorise military deployment in Ukraine due to the threat to the lives of citizens of the Russian Federation. However, losses were capped to an extent by a better than expected Manufacturing PMI report from the Eurozone area with the Spanish release showing the highest reading since April 2010, which after last weeks higher than expected CPI reading from the Eurozone area helped to paint a rosier picture of the Eurozone economy. Losses were further capped in the latter half of the session amid comments from Ukrainian PM Yatsenyuk, who said that the nation is ready for new relations with Russia, indicating that Ukraine are open to talks with Russia. Looking ahead, despite the influence of events in the Ukraine upon price action, focus for the pair will be placed upon the upcoming rate decision by the ECB with increasing speculation that the central bank could cut rates despite the recent positive slew of economic data.

Emerging Markets
Today saw the Russian Central Bank unexpectedly raise their key rate to 7% from 5.5% effective immediately in an unannounced move and thus put selling pressure upon USD/RUB, however still remained significantly elevated from Friday’s close and failed to close the gap. The central bank said they made the decision to combat rising inflationary risks and risks to financial stability, although does follow the already discussed escalation of political tensions regarding the Ukraine. Furthermore, the RCB also shifted the boundaries of its floating RUB corridor by RUB 0.20 as of Feb-28th with bank's usual policy being for the USD/RUB trading band to shift by just RUB 0.05 when the cumulative volume of FX purchases/sales reaches USD 350mln. As such, the policy change showed a shift away from regular operations. As a result of the flight to quality other emerging market currencies are experiencing significant weakness with EUR/HUF seen higher by around 300 pips.

USD/JPY
In a continuation of the trend observed following the situation in Ukraine last week, a demand for safe-haven assets was an important catalyst behind the price action, with JPY one of the main beneficiaries in FX markets and thus saw the pair finish the London session in negative territory. However, losses were capped to an extent in the latter half of the session amid the aforementioned comments from Ukrainian PM Yatsenyuk. With a lack of economic commentary today or upcoming tier 1 data out of Japan it is likely that developments in the Ukraine are to influence the price action for the pair. However, participants will also be on watch to see if there is any follow up to the commentary from BoJ’s Sato who last week said long term rates are likely to shoot up long before exit and the BoJ can continue QE after CPI reaches 2% if it judges that gains are not sustainable. However, Sato added that the BoJ could exit easing before inflation reaches 2%.