The currency markets opened for weeks trade with a decidedly risk off tone in reaction to the crisis in Ukraine as both EUR/CHF and EUR/JPY gapped lower in Asian session trade, but neither pair saw much of a follow through as the geopolitical situation remained tense but stable. The swift takeover of Crimea by Russian military forces on Sunday created what UK foreign secretary, William Hague called,certainly the biggest crisis in Europe in the 21st century. Western nations scrambled for a response including suspension of preparations for the G-8 meeting in Sochi in June. However, there has been no mention of any military aid to Ukraine or an escalation of rhetoric that would suggest that the conflict has entered a new crisis stage. So far Russia has only acted on Crimea, a semi-autonomous region in Ukraine with a large Russian population and major Russian naval fleet assets. There has not been any military response from Ukraine and given the precarious situation of the new Ukrainian government as well as the general disarray of Ukrainian military forces and society at large the prospect of a military conflict over Crimea remains unlikely. If the situation does not escalate the two countries may well come to some sort of a cold peace arrangement with Russia taking permanent control over Crimea. Although Ukrainian politicians continue to state that they will never give up Crimea, they appear to be unwilling and unable to engage Russia militarily over that issue. However, the geopoltical risks could soar if Russian military forces a make a move against eastern Ukraine which Ukrainian government and the rest of the Western world would view as a clear violation of the countrys sovereignty. The Ukrainian army has nearly 1 million men in reserve and it will almost certainly react to a Russian invasion of eastern Ukraine. Though it is not at all clear whether Ukraine will be able to muster much of defense against the Russian military machine. In any case, the full invasion of eastern Ukraine would increase geopoltical risks exponentially not only because Western powers will escalate their response to the Russian aggression, but also because such a move would raise concerns over the stability of the rest of Eastern europe and the Baltic states as well. If Ukraine becomes the first act in Russias attempt to re-establish the Soviet empire, such a tectonic shift in geopolticals could turn this regional issue into a key global conflict. For now, the markets remain calm as investors continue to bet that a further escalation of military activities is not in the interest of either side. However, the situation is fluid and certainly combustible and any further provocation by Russia could unleash much more serious risk aversion flows in the currency markets over the near term. In the meantime, the economic data from both EZ and UK remains relatively robust with PMI readings from both regions meeting or beating market expectations and if todays US ISM reports show a modicum of improvement, the risk aversion fears could recede further with both EUR/CHF and EUR/JPY filling their gap opens as the day proceeds. Thanks.
Posted on: Mon, 03 Mar 2014 11:16:37 +0000
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