Focus on Fear, Aussie on a Tear

Oil rallied Tuesday after Turkey shot down a Russian jet. The Australian dollar was the top performer while sterling lagged. Australian construction data and the BOJ's Shirai are due later. Appropriately, the best trade of the Premium Insights' 4 profitable trades has been the GBPAUD short, which is currently over 170 pips in the green.  

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Russia promised 'a package of measures' to respond to Turkey after a Russian jet was shot down near the Turkey-Syria border. However the defense minister stopped short of calling it an act of war and instead said it was a 'hostile act.' That helped to calm nerves and US stocks erased an early fall to finish slightly higher. The oil market was more skeptical, with Brent finishing up $1.20 to $46.04.

The FX market reaction to violent geopolitical developments is virtually always to buy then yen. It kicked higher when the headlines hit but without any follow-through. That could change if Russia responds with might or some other escalation of the conflict. But the easier way out is to continue to bomb Turkmen in Northern Syria to arm Assad's forces and use them to retaliate while disrupting natural gas supplies.

In any case, rhetoric surrounding geopolitical violence among world powers almost always far exceeds the economic consequences. Russia is making efforts to disrupt Islamic State oil exports but even if that supply was totally eliminated, it's negligible on the world stage.

Crude retraced almost 50% of its November decline in the past three sessions but it's little more than an oversold bounce with nothing changing in the (over) supply picture. To underscore the downside, the API reported a 2.6 million barrel per day increase in storage last week compared to the 1.2 million expected in the official government data due Wednesday.

In the near term, Australian data is in focus. At 0000 GMT, Oct skilled vacancies data is due and 30 minutes later the Q3 construction work report is scheduled. The later is expected to show a 2.0% decline but a better reading would underscore a resilient economy and emphasize that the RBA is comfortably on the sidelines.

The other event to watch is at 0100 GMT when the BOJ's Shirai makes a speech in Matsue. Suggestions the BOJ is comfortable with the economy could weigh on USD/JPY.