The headlines are dominated by the situation in Ukraine, which is finally registering on the market 's radar screen in a bigger way. Risk appetite is distinctly off in Asia and early European hours to start the week after the enthusiastic European and US close on Friday. In currencies, the usual suspect in these circumstances is the JPY rallying strongly and USDJPY pushing to three-week lows below 101.50.
Surprisingly, the euro has only edged ever so slightly lower versus the US dollar on developments — surprising because the economic and financial fallout from an escalation in the situation will hit Europe far harder than the US. Exposure to Europe from a Ukrainian economic collapse is marginal as, despite its large population of some 45 million, its economy is a third smaller than that of Greece. Financially, there could be a far greater impact, as Ukraine’s foreign debt exposure is some EUR 100 billion, and much of that is from European banks.
From here, the obvious initial key will be the EU and US response to Russia’s move as much as it will be the situation on the ground in Ukraine. While the rhetoric from the US has been rather belligerent, it is hard to see what the US has to gain from offering aggressive intervention, whether in the form of trade sanctions or even more dramatic, actual support for anti-Russian forces in Ukraine if an armed struggle breaks out. I would expect that European NATO members push back against any aggressive NATO response option. The EU will complain strongly, but any basic analysis from a realpolitik perspective suggests that its interests in Ukraine are marginal and its risks are great as more than a quarter of Europe’s gas supplies and a good deal of its oil imports come from Russia.
That said, further down the road, the risk for a wider fallout remains, depending on how the new Ukrainian government responds to Russia’s move, whether the country moves toward a split (with the built-in assumption that Crimea is already on the path to annexation by Russia) , and the severity of a struggle as the country is torn in two.
Meanwhile…
The latest official Chinese PMI’s offered few surprises, with the Manufacturing PMI just squeaking above the 50 market and the non-manufacturing PMI improving to a solid 55.5. The HSBC/Markit measure, suggested a deepening recession in the manufacturing sector with a reading of 48.5. The fallout in the AUD was rather limited so far.
The Russian central bank raised its key rate to 7.00 percent from 5.50 percent to defend against the steep weakening of the currency as the crisis in Ukraine has unfolded. The ruble basket has lost more than ten percent this year and had a disorderly start to the week today.
Looking ahead
We’ve got the constant ad hoc risks from the Ukrainian situation to consider from here on out, but we also have a number of known, key event risks this week, starting with today’s ISM manufacturing survey. Curiously, last month’s survey was very weak despite regional surveys that were strong. This month, we’ve had generally weak regional surveys but the preliminary Markit PMI number was quite strong. As a default, I would expect mean reversion and a bounce higher from last month’s extremely negative outlier. And besides, it is still tempting all through this week to believe that disruptive weather is holding back the US data — as I write, the latest winter storm “Titan” no less is on its way— ravaging the eastern half of the country. It might be early May before we get a “clear read” on the US economy, for the April data cycle.
Tonight, we have the Reserve Bank of Australia with its latest meeting and Cash Target announcement. It is likely to express satisfaction with the status quo on policy and the desire to keep rates on hold. Still, the market has been pushing a more dovish view on the RBA lately as the March 2015 STIRs are at new highs for the cycle, for example. Aussie is a difficult read due to the popularity of EURAUD and GBPAUD (i.e., if euro worries develop on Ukraine, AUD may look oddly strong across the board).
The rest of the week features the US non-manufacturing ISM on Wednesday and then the US employment report on Friday. The Bank of Canada (no expectations) is up on Wednesday and the European Central Bank and Bank of England are of course up on Thursday.
Were it not for the Ukraine situation, it would have been easy to expect EURUSD to continue to rally toward 1.4000 and possibly above on the anticipation and then reality of another do-nothing ECB meeting, but the situation is now far more complex and the risks from Ukraine are centred squarely on the euro, among the major currencies.
Chart: EURJPY
The Ukraine situation is seeing the JPY pull stronger across the board and putting EURJPY at risk of another downdraft – note the Ichimoku cloud support under fire once again to start the week. The pair can risk jumping considerably on ad hoc news developments.
More than ever, stay careful out there.
Economic data highlights
- China Feb. Manufacturing PMI out at 50.2 vs. 50.1 expected and 50.5 in Jan.
- Australia Feb. AiG Performance of Manufacturing Index out at 48.6 vs. 46.7 in Jan.
- Australia Feb. RPData/Rismark House Price Index out at 0.0% MoM
- China Feb. Non-manufacturing PMI out at 55.0 vs. 53.4 in Jan.
- China Feb. HSBC/Markit Manufacturing PMI out at 48.5 as expected and vs. 49.5 in Jan.
- Sweden Feb. PMI Manufacturing out at 54.6 vs. 55.0 expected and 56.4 in Jan.
- Norway Feb. PMI Manufacturing out at 51.0 vs. 52.5 expected and 52.8 in Jan.
Upcoming economic calendar highlights (all times GMT)
- Switzerland Feb. Manufacturing PMI (0830)
- Italy Feb. Manufacturing PMI (0845)
- France Feb. Final Manufacturing PMI (0850)
- Germany Feb. Final Manufacturing PMI (0855)
- Euro Zone Feb. Final Manufacturing PMI (0900)
- UK Feb. Manufacturing PMI (0930)
- UK Jan. Mortgage Approvals (0930)
- US Jan. Personal Income and Personal Spending (1330)
- US Jan. PCE Deflator/PCE Core (1330)
- Eurozone ECB’s Draghi out testifying before European Parliament committee (1400)
- US Feb. ISM Manufacturing (1500)
- US Jan. Construction Spending (1500)
- Australia Q4 Current Account Balance (0030)
- Australia Jan. Building Approvals (0030)
- Australia RBA Cash Target (0330)