Tensions remain high in Ukraine

Tensions remain high in Ukraine, whilst concerns grow over the political situation in Turkey and military activity along the country’s border with Syria. Add to this the fact that in the last few hours there’s been a spat between North and South Korea, and it really does seem as if there’s an international crisis just waiting to happen. Combine this with the fact the US is repeatedly sending out signals that interest rates will now likely rise quicker than had been expected and it really does set the scene for increased volatility in currency markets in the short to medium term.

USD/JPY

Having spent much of last week tucked between 102.00 and 102.50, there was a notable breakout on Friday after US consumer spending rose at its fastest rate since November. The overall figure remains soft but it’s signals like this that are adding to the belief that rate hikes from the Fed are moving increasingly closer to becoming reality. Combine this with the fact that the new sales taxes are set to hit Japan this week and it’s another reason to be convinced that this pair has been sitting at an artificially low level for too long. Jump back to the end of last year and many were happy to call USD/JPY as heading for 120 or so. Certainly any deterioration in the situation on the Korean peninsula could be further cause for selling down the Yen and the overnight release of disappointing Japanese industrial production data will at least help consolidate around these levels. However with the US economy still not properly back on track, there’s still the risk of conflicting signals coming from the Fed – something that could easily initiate another reversion.

AUD/USD

The headache continues for the RBA as the Aussie dollar edges its way back towards parity against the greenback and the bank’s governor appears to have given up attempts at talking the currency lower. He managed this feat quite successfully last year, but as the local economy has shown resilience – and there hasn’t been that hard landing from China (at least not yet) – then it does lurch back to the fundamentals. The next rate verdict from the RBA is due tonight but there’s no expectation of any change in policy here. Granted as talk of the Chinese credit bubble continues this may serve as a natural brake on the pace of appreciation going forward, but it does seem as if there are plenty of willing buyers and after last week’s failed attempt on 0.9300, a retest of this will be what many are looking for.

Asian equity marketsThere’s been a degree of risk-on trade taking place across much of the region of late with stocks surging higher as a result. The one broad exception however has been China, where mounting concerns that government policies to stimulate growth won’t now be delivered is taking some money off the table, leaving the Shanghai composite to underperform its peers. Obviously tomorrow’s manufacturing data has the potential either to exacerbate the slide, or to act as the catalyst for the PBoC to make a call on stimulus measures, but the current situation, combined with the fact that the IPO market is set to be restarted too, all adds up to good reason why traders should be wary of Chinese equity markets in the near term.

Economic events to watch this week

Chinese manufacturing PMI data has the ability to cause a degree of volatility across many markets although how Beijing responds has the potential to be even more significant.

Australian rate verdict – no change expected, so even just a hint as to just how long rates can be left unchanged could deliver some movement for the Aussie dollar

Non farm payrolls on Friday – analysts have struggled of late to call this number correctly so look for volatility here on the US$, US treasuries and major US indices.

Geopolitical events to watch

Tensions between North and South Korea were stepped up a notch today following a military incident between the two foes. This remains something of a tinderbox situation.

Russia’s next moves over Ukraine will also be worth paying close attention to given the failure of the US to break the deadlock in talks held over the weekend. Russian troops remain amassed along Ukraine’s borders and Moscow wants to see structural change in Kiev. As sanctions continue to hit Russian economic growth, Putin may feel that his hand is being forced into action.

Market holidays

No major market holidays this week.