Week In FX Europe – Russia Has Euro Stocks Offside

Ms. Yellen has come and gone and her labor and rate thoughts will be deciphered in greater detail after the weekend. The European session is closing on the “wrong side of right” as fresh signs of escalation to the conflict in Ukraine is again unnerving investors.

Euro equity bourses have finished the week in the red after a Russian aid convoy entered into Ukraine territory. This so-called humanitarian act is being viewed as an act of Russian aggression. Due to the strong Russian/German trade ties, the German DAX is very sensitive to any increase in tension with Moscow and the West, closing out the day down -0.7%.

The fallout from Ms. Yellen’s “less-dovish” comments has been minimal and her counterpart at the ECB, President Draghi, is not expected to deviate too far from his recent remarks. Nevertheless, with evidence of growing ‘low’ inflation or potential ‘deflation,’ Draghi will not do doing or saying anything late Friday that might impede the EUR’s weakening stride. The EUR (€1.3234) continues to straddle atop of its yearly low, having come under pressure in recent months, due to a divergence in G10 monetary policy.

With ongoing Euro inflation worries, investors would not be amiss to expect the ECB to consider further easing measures. But before they do, the ECB will want to see what real effect its recent change to monetary policy (cut base rates and increase credit) will have on the Eurozone. The biggest unknown variable remains Russia. The ongoing tit-for tat EUR/Russian/US sanctions will eventually have more of an impact on Germany – Europe’s economic backbone. The ECB cannot afford for the regions strongest economy to start peddling backwards, it will only drag the whole region into a bigger and deeper hole. Despite weaker Euro data, there is room for the ‘single’ unit to come under further pressure; mostly on the back of investor sentiment staying negative. Risk aversion trading strategies remain in vogue, with 10-year Bunds trading 3-ticks below the psychological +1% at 0.97%.

What to expect next week

The UK starts the week off with a Bank holiday, while investors will be getting a peek at German business climate conditions, new home sales data stateside, and trade conditions from the Kiwi’s. The market will be openly debating what transpired in Jackson Hole, while nervously waiting on Russia’s next move. In the US, investors will have consumer confidence and preliminary GDP to contend with mid-week. Closing out the week, the short-term fate of the loonie will be influenced Friday’s GDP release.

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