Currencies not reflecting geopolitical worries as oil, gold or equities

Outlook

Numerous commentators are saying that there is nothing the US/Europe/NATO can do in Ukraine’s civil war, and not a single analyst has ventured that maybe Ukraine shot down the plane itself to draw in the West. Evidently Ukraine has some of the BUK missiles from long ago. But the leaked telephone call in which a separatist admits the “mistake” seems back up the argument that they are the ones at fault, and never mind that a civilian airliner should have been re-routed. European air traffic control leaves a lot to be desired. Besides, military ex-perts probably already know the exact launch site—the math is not that hard for them. The crash investigation team is on its way, although the black boxes will be sent to Russia, say the separatists.

Russia can’t get past giving sophisticated weapons to incompetent separatists. They will probably start reminding the world that Middle East separatists are using US weapons against US allies, whether captured or donated, but that doesn’t help Russia. Some analysts say one option is for Russia to assume control over the separatists by invading and literally taking over. Putin blames Ukraine for having a civil war in the first place, a ridiculous stance. German Chancellor Mer-kel, facing questions about a new and heavier round of sanctions, counselled a waiting period of more than 24 hours after the last round, effectively putting the ball in Putin’s court.

Russia in general, including Putin, does not have a history of doing what is best for the economy (and thus the average Ivan), but the threat of recession and isolation is very real. A smart leader would start focusing on that. There is some tiny remote possibility that Russia will withdraw support from the separatists.

Bottom line, nobody knows the end-game. The traditional Russian response would be to send better-trained military leaders to the separatists—in other words, no end until the civil war ends. Chances are the sell-off fades away. Sell-offs need constant refreshing of fuel. If nothing new and horrible happens, panic fizzles. In that case, we have to expect equi-ties to recover and gold to retreat.

Other than geopolitical worries, the news today centers on the consumer confidence from the University of Michigan and a speech by BBK chief Weidmann in Madrid, where (according to the WSJ), observers expect some words on QE by the ECB. We also get Canadian CPI, but after the WSJ interview with Poloz, who thinks inflation is within acceptable rang-es, we will probably be disappointed—CAD hardly ever moves dramatically more than once.

One thing to note is that currencies are not reflecting geopolitical worries to anywhere near the same extent as oil, gold and equities. One fixed income analyst (Rabobank) told Bloomberg “The market is quite insulated to geopolitical risks.

The amount of central-bank liquidity has desensitized the market to these events. It looks, as things currently stand, as though we are not going to get a huge bid for havens.”

We agree. The lack of response may be the jaded minds of FX traders, but more likely it’s that current events are not relevant to the real FX market movers—central banks and their decision-making. For example, many have noted that low wage growth in both the UK and the US gives the BoE and Fed a fair amount of breathing room before they have to face hiking rates on grounds of inflation. This is to assume that only wage inflation is “real” and has a lasting effect that central banks can’t avoid. We are made deeply unhappy on two counts—first that central banks are perceived as so simple-minded, and second that it might be true. But until we get something more from Carney and Yellen, curren-cies are without a compass. We are getting neither the usual euro bounce after a downside breakout, nor a continuation. We are in limbo. The best course of action under the circumstances is no action—just get out.