Risk Event – Crimea Referendum in Focus

Forex News and Events:

Safe Haven Positioning

Markets are showing distinct signs of risk aversion as traders accept the fact that the situation in the Ukraine will not have a neat solution. Equity market are in the red and safe-haven assets like gold, USD, and US treasuries are in demand. Reuters is reporting that Russia has launched new military exercises near the Ukrainian border. There is no sign that recent discussions of the UN or in London today are convincing Russia to back off Crimea. This Sunday's referendum in Crimea on joining Russia should keep risk appetite low for the remainder of the day. In addition, we suspect heavy safe haven positioning (USD, Gold & CHF) heading into the weekend. Crimean referendum which most likely to will lead to the separation of Crimean from the Ukraine and possible annexation by Russia, we suspect further appreciation in Gold and CHF. Our view in the short term, is that there is a significant chance of an escalation in tension after the votes either by the G7 slapping sanctions on Russia or actually military conflict. Either way safe haven trades will remain well bid.

Draghi Confronts Inflation & EUR

Overnight comments from ECB President Draghi indicated that European policy markets are realizing and now expressing the significant risk of deflation from low inflation environment while acknowledging the role a strong EUR has for monetary policy. Admittedly the comments were on the light side in regard to content, it’s the change of emphasis that has captured our attention. In regard to inflation the ECB president stated "Any material risk of inflation expectations becoming unanchored will be countered with additional monetary policy measures." While given the low level of inflation and effective EUR exchange rate, Draghi said the euro exchange rate was "becoming increasingly relevant in our assessment of price stability." The market clearly heard the comments as the EURUSD quickly dropped roughly 60 pips. However, the lingering effect of his verbal intervention is doubtful unless words are backed up with policy action. And his will to adjust, especially considering the recent uptick in inflation reads, is suspect.

China’s Weak Growth

Yesterday China's weak economic data in the form of Industrial production and retail sales failed to disrupt a mild recovery in Asian equities. Yet we suspect that the rally in risk appetite will be short lived. Commodities and currencies linked to commodities will especially have a challenging time. There is growing uncertainty over the outlooks in China and policy makers ability to easily transition to an export to consumer economy. The primary worry is the authorities clear zeal to control the unregulated credit market and manage a broad part of the financial market. The fear is that in the short term this will lead to excessive volatile and distortion. While the general opinion is that the PBoC will need to keep policy loose, we suspect that there are conditions where tightening could be rationalized. The issue now stands that with China's growth decelerating, there is a significant lack of demand for commodities to fuel manufacturing. This will drag commodity prices lower as well as regional EM exporters. We are seeing this result unmistakably in industrial metals for manufacturing and which is used as collateral for loans. Authorities are attempting to manage this unregulated financial process, putting direction selling pressure on industrial metals (specifically Copper). The real risk of slowing demand and perceived risk of events in the Ukraine should start putting pressure on risky assets.

Today's Key Issues (time in GMT):

2014-03-14T10:00:00 EUR Employment Q/Q 0.00 prior
2014-03-14T12:30:00 USD PPI Final Demand m/m 0.2% exp /prior
2014-03-14T12:30:00 USD PPI x food & energy 0.1% exp 0.2% prior
2014-03-14T12:30:00 USD PPI Final Demand y/y 1.2% exp/ prior
2014-03-14T13:55:00 USD Univ. Michigan Confidence 82. exp 81.6 prior

The Risk Today:

EURUSD completely reversed yesterday's strength, warning of a potential false breakout of the strong resistance at 1.3893. However, the short-term technical configuration remains positive as long as the support at 1.3834 (11/03/2014 low) holds. Another support is given by the rising channel (around 1.3761). A resistance can now be found at 1.3967 (13/03/2014 high). In the medium-term, the ascending triangle formation favours a further upside potential towards 1.4368. A key resistance lies at 1.4247 (27/10/2011 high), whereas a key support is at 1.3643 (27/02/2014 low).

GBPUSD completely erased yesterday's gains, creating a bearish intraday reversal. Monitor the hourly support at 1.6569 (12/03/2014 low). Another support is given by the rising trendline (around 1.6428). Resistances now stand at 1.6718 (13/03/2014 high) and 1.6786 (07/03/2014 high). In the longer term, the technical structure favours a bullish bias as long as the support at 1.6220 (17/12/2013 low) holds. The decisive break of the resistance at 1.6668 opens the way for a move towards the major resistance at 1.7043 (05/08/2009 high). The recent weakness still looks like a correction within an underlying uptrend.

USDJPY continues to decline and is now close to the support area given by 101.20 (03/03/2014 low) and 100.76. Hourly resistances stand at 102.42 (intraday low) and 102.86 (13/03/2014 high). A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.26) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013) holds. A major resistance stands at 110.66 (15/08/2008 high).

USDCHF has made significant new lows, confirming a further medium-term decline towards the key support at 0.8568. The shortterm technical structure is negative as long as prices remain below the resistance at 0.8816 (07/03/2014 high). The initial resistance at 0.8760 (intraday high) is challenged. An hourly support now lies at 0.8699. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. However, the break of the key support at 0.8800 (27/12/2013 low) opens the way for a further decline towards the next key support at 0.8568 (27/10/2011 low).

Resistance and Support: