It’s not every day that a nation, let alone two, announces that it will be applying for NATO membership. But yesterday, when Sweden joined Finland in announcing its process towards membership of the defence body, the attention was elsewhere: Russia. Russia has seemingly struggled to make the advances it has expected to achieve with ease in Ukraine. Despite its military setbacks, it has still talked a big game about the consequences of these two nations joining NATO. With particular reference to Finland and the border it shares with the nation, Putin had spoken of the technical exercises and deployment of troops that would inevitably ensue should the nations pursue membership. Stakes and tensions were high therefore surrounding this potential geopolitical shift.
This signposted potential reaction and the propensity for wider-spread conflict given such a reaction from Russia had also helped to undermine risk conditions. It has served its own role therefore in moderating growth expectations to the detriment of more volatile currencies and assets in favour of safehaven assets, including the US Dollar. However, yesterday President Putin softened his tone in the face of the accession announcement from the two Nordic nations, saying that he had ‘no problems’ with Finland or Sweden and that their inclusion within NATO posed ‘no direct threat to Russia’. The President of course made this conditional on a characteristic admonition to NATO not to place military posts in these two countries nor to make them the hosts of nuclear weapons.
The path of NATO expansion still remains vulnerable. At present, Turkey’s President Erdogan is suggesting he will block and refuse the applications to join the alliance. However, the risk of more immediate tensions and wider-spread conflict around Northern and Eastern Europe has subsided. Accordingly, the Euro, whilst still very much overwhelmed by the Dollar, has ticked up from its lows sitting around 1 cent above its Friday closing price. Should the geopolitical rhetoric from Russia revert to a more hard-line approach once again, this risk could rapidly be priced back into EURUSD.
Discussion and Analysis by Charles Porter