Calm before the storm for FX pairs

We kick off the week with some big developments on the macroeconomic front. 

The bad news from the Ukraine referendum was confirmed with a whopping 95.5% voting to become part of Russia. This essentially confirmed what markets were fearing; the question now is does the West react to this development? Russia still has to sign legislation confirming Crimea is now part of the country and this will likely be greeted by severe criticism.

Meanwhile, China widened the yuan’s trading band from 1% to 2% around the central parity rate, which is also known as the fix, on Saturday. This will kick in today and shows China remains committed to its currency reform policy. This should generate more volatility and will ultimately impact commodities and commodity FX. While this move had been expected for a while, the timing is interesting given we recently saw the offshore CNH move above the onshore CNY. This could result in some speculative USD selling in the near term. Volatility will increase along with volume, and the PBoC said it will step in when and if necessary. Given currency fundamentals, most analysts expect to see the currency strengthen over the year.

Gold the only asset trending in Asia

It has been an interesting open in the FX space with commodity FX like the AUD gapping lower, but managing to find some stability. The single currency is the one which most would have expected to see some moves given it’s the most exposed to the Russia. EUR/USD is holding above 1.39 and perhaps this is the calm before the storm as we wait to hear from the US and the rest of the G7. There has been talk of a big US treasury liquidation and this has kept traders away from bidding the greenback higher. Presumably Russia has some big investments in the US which it is looking to liquidate.

USD/JPY at 101.4 and has barely flinched all morning. It is a really difficult call right now to judge which way sentiment will swing at the moment, but I feel it’ll be a risk on/off trade as soon as we get more clarity from the Russia situation. I’ll also be watching the CNY closely for any volatility which could prompt moves across the risk space. For now though, it is certainly wait and see for the major FX pairs. In a clear sign of uncertainty, traders have continued to bid gold higher which is essentially the only asset trending at the moment and trading at a six-month high.

Spot gold
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