We wrote recently about how the residual risk that remained priced within (FX) markets was increasingly being removed from positioning data. Despite broad doubts about the credibility of claims of progress in Russia-Ukraine peace talks, the market scaled back demand for safe-haven FX, finding comfort in more moderate wholesale energy prices and macroeconomic conditions. More recently, the fact that Russia appears to have distanced itself from demands for settlement in Ruble for energy exports has continued to support risk conditions.
When highlighting the more balanced positioning in markets and more sanguine outlook we also stressed the propensity for complacency to feed into price action. Given that the market had largely discounted the risks of the conflict in Ukraine focussing instead on growth prospects and respective monetary policy outlooks, headlines emanating from the invasion once again hold the power to catch the market off guard.
One such headline and topic that holds the propensity to change the market’s relative calm surrounding the conflict in Ukraine is claims of war crimes. War crimes create and demand huge attention on the international stage. They are therefore significant and powerful catalysts of sanctions which have been a stronger driver of rates within currency markets, far more so than death tolls and geographical advance.
Via its significance to the global political economy and sanctions in turn, the claims and trials against war crimes allegedly committed could therefore reintroduce defensive demand within markets. Alongside technical resistance and price dynamics driven by the development of interest rate differentials, these allegations have undeniably contributed to EURUSD’s sell-off in the past three trading sessions.
Discussion and Analysis by Charles Porter