Risk FX Rallies as Russian Troops Return to Barracks

Market Drivers March 04, 2014
Risk rallies as Putin recalls Russian troops to barracks
RBA keeps rates unchanged notes strong AUD
Nikkei 0.47% Europe 1.47%
Oil $103/bbl
Gold $1338/oz.

Europe and Asia:
AUD Building Approvals 6.8% vs. 0.7%
AUD RBA no change
GBP Construction PMI 62.3 vs. 63.6
EUR PPI -0.3% vs. -0.1%

North America:
USD Economic Optimism 10:00 AM

Currency markets breathed a small sigh of relief with risk sentiment improving throughout the night after Russia recalled it troops to barracks at the conclusion of its war games. Currencies popped in reaction to the news seeing it as a sign of de escalation of hostilities. There was speculation that Vladimir Putin would hold a press conference but so far the Russian leader has not made any public comments on the recent moves.

Despite some small signs of easing of tensions Russian troops continue to surround Ukranian military bases in the Crimea and Ukrainians have so far refused to surrender their weapons or positions. The standoff therefore remains in place and the prospect of an errant shootout that could lead to a skirmish is still quite high making the situation in Crimea high combustible.

Still despite continuing tensions on both sides the situation in Crimea appears to have been stabilized and suggests that as in past conflicts such Georgia and Ossetia, Russia will only seek limited advantage and will not expand its military campaign beyond the current scope of operations. If that were the case, markets would likely begin to ignore the situation in Ukraine and re-focus their attention back to economic data.

On that front the calendar today was relatively quiet but in Australia the RBA reaffirmed it neutral stance while at the same time making yet another reference to the strong Australian dollar. The Aussie quickly dipped towards the 8900 figure in a knee jerk reaction to the rhetoric from the RBA, but quickly rebounded and rose to a high of 8970 as traders saw little chance of RBA changing policy anytime soon.

One key reason for RBA relative hawkishness is the fact that Australian housing market remains strong and any further rate cuts would only stoke demand in the sector. Today's much better than expected Building Approvals data which rose 6.8% versus 0.7% eyed, suggests that the RBA's hands are tied for now. The Aussie therefore is likely to channel between 8800-9000 for the time being.

Elsewhere, cable sold off mildly in reaction to the slightly weaker PMI Construction data which came in at 62.6 versus 63.6 forecast, but the drop may have been cause by tough weather conditions and the reading still remains near recent highs. The more interesting question will be tomorrows PMI Services report which is expected to print just slightly lower than the month prior. If the services report remains near the current levels, cable could stage another rally attempt at yearly highs as market will be become even more convinced that BoW will be the first G-7 central bank to hike rates.

In Europe the PPI data continued to signal deflationary trends coming in at -0.3% versus -0.1% eyed. The market however ignored the news as traders are convinced that the ECB will not move rates at this meeting and will view the decline in price levels as temporary and transitional. The EUR/USD for now is solely focused on the geopolitical risks and as long as the situation in Ukraine does not escalate, the pair could see further rally as the day proceeds.

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