Geopolitical risk in spades

Crimea Vote 

Crimea voted in an election to succeed from Ukraine and to join Russia leaving the markets to ask, what is next? We know that sanctions may follow assuming that Russia recognizes the vote and there is no sign that they will not. In the meantime the commodity markets are moving on not only Ukraine woes but China, Libya, Nigeria and the EU. While the initial risk on seems to be slowing, there is no doubt the markets remain on edge. Comments by Mario Draghi suggesting that the EU is looking to “act against deflation” adds a new element to buy euro, ask questions later trade is not a given.

Bloomberg News Reports that “Draghi said his forward guidance may help to weaken the euro and lower real interest rates, easing the risk that inflation won’t return to the goal set by policy makers. 

Guidance “creates a de facto loosening of policy stance, as real interest rates are set to fall over the projection horizon,” Draghi said in Vienna yesterday. “At the same time, the real interest-rate spread between the euro area and the rest of the world will probably fall, thus putting downward pressure on the exchange rate, everything else being equal.”

China also is a risk as they try to engineer a soft landing and unwind and deleverage risk against a backdrop of Fed tapering. The Chinese yuan is taking a hit as the Chinese central bank widened the trading range but still will set the closing price.  

Reuters News reports that China's yuan eased against the dollar on Monday after the central bank doubled the currency's daily trading band as part of its commitment to let markets play a greater role in the economy. Yet the currency moved in a relatively narrow range reflecting market views that the People's Bank of China will seek to limit currency swings at a time when markets fret over China's cooling growth and the quality of corporate debt.

"The PBOC, with the help of major state-owned banks, will for certain tighten the grip on yuan's value in coming days and weeks to prevent what it sees as excessive volatility," said a dealer at a European bank in Shanghai.

In the longer run, however, the central bank is expected to allow the currency to move in a broader range in a sign of its confidence that it can keep speculators at bay and that the economy was mature enough to handle greater uncertainty about the exchange rate. "Over time, the widening will pave the way for the PBOC to gradually lessen intervention in daily trading and will help China's reforms to make the yuan fully convertible eventually."

On Saturday, the People's Bank of China doubled the yuan's daily trading range, so that it can now rise or fall 2% around the daily midpoint rate. The currency opened at 6.15 to the dollar, just 0.29% weaker of the official mid-point rate. It briefly fell to an intraday low of 6.1642, 0.2% weaker than Friday's close.

 

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