Ukraine jitters raise risk apprehension
With US markets closed for a holiday overnight, volumes and volatility were muted in currency markets, sparing them the worst of the ravages seen elsewhere. Still, the US dollar did receive a modest haven bid, and the old adage of always buying US dollars in a war is as good today as it was all those decades ago when I started my trading career. Overnight the dollar index rose unwound all its early Monday losses to close at 96.16, where it remains in Asia. 95.70 and 96.50 are the near-term support/resistance levels.
Asia FX traders are clearly in wait-and-see mode today with volatility muted and the major currencies most around where they opened yesterday morning. EUR/USD is steady at 1.1305, USD/JPY at 114.65, GBP/USD at 1.3585, AUD/USD at 0.7195 and NZD/USD at 0.6705 with AUD and NZD giving back all of yesterday morning’s gains. With the Ukraine situation deteriorating from a market perspective, the risks have skewed towards a higher US dollar, and potentially yen, as investors look for havens. The euro is likely to be the most vulnerable major currency, due to its energy supply chain vulnerability to Russia and pure geography.
Asian currencies retreated overnight as well, perhaps more on rising oil prices than Ukrainian geopolitical nerves, although they are all an intertwined story. The fallout remains relatively modest for now, especially with USD/CNY remaining anchored near 6.3500. A rise through USD 100 by Brent crude, seemingly inevitable in my opinion, will change that dynamic with most of the region being major energy importers. Malaysia and Indonesia should fare better than most because of that.
Oil prices leap higher as Ukraine crisis worsens
If you’ve read the note this far, you know what comes next. Oil prices surged higher overnight on thinned US holiday liquidity after President Putin crushed the summit olive branch and commenced “security operations” in his breakaway satellite provinces of the Ukraine. Brent crude surged 3.60% higher to USD 97.00 a barrel, with WTI futures rallying 2.10% higher to USD 93.90 a barrel.
There is some divergent price action in Asia today with Brent crude unchanged at USD 97.00 a barrel, while WTI has fallen 1.05% to USD 92.90 a barrel. The White House has just announced that sanctions are coming, and I suspect that US oil supplies, rather more secure thanks to domestic production and benchmarked to WTI, has prompted some basis trading with Brent. Brent crude, being the international benchmark, should remain rock solid at these levels given developments in Eastern Europe. Also, given it has been a US holiday, I would take today’s WTI price action in Asia with a huge grain of salt.
Short of the US and Europe throwing the Ukraine under the political bus and appeasing Putin in totality, it seems inevitable that Brent crude will test USD 100 a barrel sooner rather than later. A full-scale Russian invasion likely will see it spike to USD 130 (at least) dragging WTI with it. It is hard to see Brent moving back below USD 90.00 a barrel anytime soon now, with OPEC+ capacity limited in its ability to pump more, and Iranian crude frozen out of the market.
Gold rallies on Ukraine developments
Gold prices rose overnight as the Eastern European situation deteriorated and investors went hunting for safe-havens. Gold rose 0.35% to USD 1904.00 an ounce with volumes muted by the US holiday. In Asia, gold has climbed once again, rising 0.25% to USD 1909.00 an ounce as the haven theme continued.
Stagflation or a Russian invasion of the Ukraine, gold should be a winner in the coming days and weeks. Initial support should hold at USD 1880.00, while gold looks set to test resistance at USD 1920.00 an ounce sooner, rather than later. That opens USD 1960.00 and then USD 2000.00 an ounce.
As a stagflation/inflation hedge, or as a hedge against uncertainty, gold appears poised to come into its own and a retest of the previous all-time highs near USD 2100.00 an ounce can not be ruled out.
