'Investors don't see a meaningful catalyst for the Crimea crisis' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXstreet.com

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

What can the short and long-term consequences of EU and US sanctions on Russia be? Will the Russian economy withstand the blow? Can Europe manage without Russian gas?

The markets have been relatively sanguine about the implications of the West’s repose to the crisis in Crimea. Crude oil prices have not shot higher and the S&P 500 – a benchmark for market-wide risk appetite – has seemed far more responsive to China slowdown fears and Fed policy expectations. That suggests investors don’t see a meaningful catalyst here for the time being. With that said, geopolitics are notoriously difficult forecast and the possibility for a serious escalation that undermines market confidence and boosts haven currencies like the US Dollar and Japanese Yen certainly exists.

Do you see a risk of a domino effect in China, after another company has collapsed this month, unable to meets its debt obligations? Why did the Chinese government start allowing corporate failure?

China has been very vocal about wanting to transition to a more open, consumption-driven economy rather than a rigid export-oriented one. They have also been candid about the probability that this process will bring with it a near-term slowdown in economic performance. Allowing companies to fail, expanding the CNY trading band and moving to flush out froth in domestic credit markets are all parts of this process. In the G10 FX space, the most direct implications are for the Aussie Dollar. China is Australia’s largest trading partner and a slowdown there can have spillover effects, delaying the onset of RBA interest rate hikes and undermining the currency’s yield appeal.

Prices of copper, often viewed as an indicator of economic health, have been dropping recently, hitting the lowest levels seen since 2009 last week. Do you believe it is a signal that the global economy is in fact still weakening?

China is the world’s largest copper consumer and the recent slump in the industrial metal is likely a reflection of recently soft economic data from the Asian giant. On the whole, the global economy seems to be cautiously improving, with the trends in the JPMorgan Global PMI index as well as the Citigroup Economic Surprise Index gauges tracking the performance of G10 and EM economic news-flow relative to expectations pointing higher over the past year.

Six weeks of higher closes in EURUSD are impacting average forecasted values in all time horizons. Traders are becoming complacent with the trend... Is the EUR/USD condemned to the 1.4000?

EUR/USD looks to be nearing an important top in the relatively near term. We’ve traded within 40 pips of the 1.40 level and the figure may hold as resistance as doubts about the continuity of Fed QE “tapering” efforts scatter after a hawkish March FOMC meeting, which stands in stark contrast to a dovish ECB. While Mario Draghi and company have been resistant to ease further thus far, there is good reason to believe this has to do with concerns about policy transmission. That issue ought to be dealt with in the scope of the Asset Quality Review (AQR) that is due to be completed in October, to be followed by expanded ECB stimulus thereafter. Markets are forward-looking, so speculation about this scenario will meaningfully build long before then. That bodes ill for EUR/USD in the months ahead.

Goldman Sachs changed its forecast on USD/JPY to 97.00 for the months to come; Do you expect the pair breaking below 101.00 and event with sub 100.00 prices?

Fed policy expectations are crucial to USD/JPY at this point as the BOJ remains in a holding pattern while policymakers evaluate the outcome of the April sales-tax increase. That process will take several months at least. In the meantime, the Fed will continue to taper, which ought to bolster the greenback’s yield advantage and push USD/JPY higher anew. The pair may slump if a bout of risk aversion fuels Yen gains amid an unwinding of carry trades funded in the perennially low-yielding currency, but sentiment’s stubborn resilience in the face of meaningful headwinds seems to make this a relatively distant prospect at least so far.