Financial Markets Back Into Risk-off Mode

Financial Markets Back Into Risk-off Mode

Risk sentiment has swung rapidly this week back and forth between negative and positive according to the latest headlines on the conflict in Ukraine.  

Financial Markets Back Into Risk-off Mode
Financial Markets Back Into Risk-off Mode

Yesterday, conciliatory comments from Russian President Vladimir Putin encouraged risk demand and dampened safe-haven buying, but as news broke today of renewed conflict in Ukraine, tensions have heightened once more, plunging the financial markets back into a ‘risk-off mode’ and spurring a flight to safety.

Ukraine says it has repelled a Russian military incursion into its borders, though the Russian defense ministry issued a denial, branding Kiev’s report of a military column entering Ukrainian territory as ‘some kind of fantasy’.  EU foreign ministers have, in turned, responded with a warning that ‘any unilateral military actions on the part of the Russian Federation in Ukraine under any pretext, including humanitarian, will be considered by the European Union as a blatant violation of international law.’

Despite Russia’s denials, NATO has said there was a Russian incursion into Ukraine’s borders and this latest turn of events would seem to be a significant escalation in military tensions between the two countries.

While geopolitical concerns have been influencing the stock market more than the forex market so far this week, this latest news has started to wield a considerable influence on exchange rates. Understandably, currencies viewed as less risky have seen gains today, with the Japanese yen and the Swiss franc both gaining against the US dollar. By mid-afternoon in New York, USD/JPY was down 0.13% at 102.31 while USD/CHF plunged 0.40% to 0.9029.

Bucking the risk-off trend was the Canadian dollar, which was boosted by a substantial revision by Statistics Canada to its Labor Force Survey for July. July’s employment growth was originally reported as being just 200, but this turned out to be a huge underestimate attributed to human error. The agency gave an amended estimate of 41,700 today, completely changing the picture for the Canadian labor market. Statistics Canada said the error ‘was an isolated incident’.
USD/CAD dropped as low as 1.0860 in the wake of the announcement, though the news out of Ukraine sparked a recovery in the US dollar, and by mid-afternoon it was trading down just 0.05% against the Loonie at 1.0895.

The latest US price data continues to paint a picture of benign inflation, following on from yesterday’s import and export price report. The Bureau of Labor Statistics today released its Producer Price Index (PPI) for July, which showed factory gate prices easing. The PPI for final demand rose just 0.1% in July, a significantly slower pace than the 0.4% increase seen in June. Excluding the volatile components of food and energy, the PPI rose 0.2%, in line with estimates and mirroring the rate of change seen in June.

These comparatively soft levels of price rises at the wholesale level would seem to foreshadow similar easing at the consumer level: we’ll find out next Tuesday with the release of the Consumer Price Index, but based on the indications for July so far, the Fed is unlikely to be worried about upside risks to inflation for the time being.

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