FX DAILY: Can Putin be taken at face value?

8th May 2014

  • The BoE’s FPC may act to cool the booming property market in London and the South East by introducing lending controls into those areas, according to HSBC Finance Director, Iain Mackay. (The Guardian)
  • UK first time buyers will likely need permanent help from the state to get on the housing market once interest rates start to rise. Higher rates could impact on government budgets as schemes like Help to Buy must remain in place as the rates rise. (The Times)
  • Barclays has moved to cut 7,000 jobs from its investment banking operations and create a £400bn “bad bank”. (The FT)
  • South Korea’s foreign exchange reserves rose to a record high in April on the rise in the value of non-dollar assets and investment profits. (Yonhap News)
  • Chinese trust and investment companies are estimated to be sitting on non-performing assets of around CNY48 billion and carrying a non-performing loan ratio of 0.5%, China’s trust and investment industry held total assets of CNY11.73 trillion as at the end of March and is the country’s second largest financial industry only after banks. (Economic Information Daily)
  • Overseas financing for Chinese property developers have slowed as overseas investors start to lose confidence in China’s property market, according to data from Centraline, a major property agent. (Economic information Daily)
  • UK RICS House Price Balance rose 54% in April, down from 57% in April and expectations of 55%. The net 54% of surveyors reporting house price compares with a long-run average of 15%.
  • Australia created 14.2K jobs in April, beating expectations for 8.8K new jobs, down from 21.9K in March. The jobs gain was entirely due to full time job creation.
  • China’s Trade Balance rose to $18.46B in April, against expectations of $16.70B and a previous figure of $7.7B.
  • China’s better than expected increase in trade balance was a result of a 0.9% annual increase in exports against -3.0% expected and a 0.8% year-on-year rise in imports versus -2.1% expected.
  • Germany Industrial Production fell -0.5% on the month in March, versus consensus for a 0.25 gain. February reading was revised slightly to 0.6% from 0.4% MoM.

Russia’s President Vladimir Putin made a surprise u-turn on Ukraine yesterday, calling on pro-Russian groups in eastern Ukraine to postpone a planned referendum on independence and even calling the May 25th Ukrainian presidential election a “step in the right direction”. This surprise softening in Putin’s stance allowed safe haven currencies such as the Swiss franc and the yen to weaken and the Russian Ruble to rally -0.29% overnight. The question is can we take Putin at face value, especially for someone who is known for his u-turns. It is my view that this falls into Putin’s plans for playing hot and cold over Ukraine to sow the seeds of chaos and confusion in the country and ultimately undermine the government in Kiev. The move will also shore up sympathy for Russia in the international environment. Putin is not just playing a propaganda game at home but in the international environment as well. I wonder if a visit from the OECD president yesterday had anything to do with this change of heart. Putin is playing a tactical game, garnering sympathy for Russia and trying to make Ukraine look like a fool at the same time. I would be caution to write off the Ukrainian crisis yet and see more tensions going forward. Note that Russia didn’t outright endorse the May 25th election.

Saying this there is a reason why major currency crosses have been so complacent to the Ukrainian risk – because the risk is limited. Tony Blair speaking in London on April 22nd alluded to an important point about this topic. The stand-off between the West and Russia is not the result of a long embroiled ideological conflict. There is no underlying religious conflict t or years of casualties on both sides that would harden positions. It was always Russia’s intention to use Ukraine as a buffer nation. Europe has little appetite to impose sanctions that would really hurt Russia. Societe General and Carlsberg are among the corporates that are already feeling the pain from Russian tensions. Heading into a general election, the US doesn’t wish to get into an argument on Russia on electorates’ doorsteps. As a short-term play, we recommend going long RUB on the next flare up in tensions. While in the long-term, a move towards a freely floating currency would argue for a weaker RUB, there is value to be had in a short to medium term exposure.

Euro-dollar has been stuck in the currency equivalent of no man’s land over the last three sessions as markets await today’s ECB press conference. The euro’s move higher on Tuesday to just below the $1.3950 level was only in reaction to a rally in sterling and a slightly weaker dollar. April’s increase in headline CPI has taken quantitative easing off the table for this meeting at least, though we doubt Draghi ever had the stomach for the policy. Draghi has a problem. The eurozone is in recovery with consumption and investment, both inflationary, driving growth. The result of this recovery however is a stronger euro, exacerbating disinflation and causing problems on the ground for the region’s exports. His threats of QE have limited impact and may even be exacerbating the stronger euro through continuous inflows into the peripheral bond market on a QE bet. Expectations of QE are already priced into the euro which raised the question of where the euro will trade if QE isn’t implemented -$1.42,$1.45…? Draghi finds himself trapped in a maze of his own making. Draghi is unlikely to implement QE at this policy meeting and will have to come up with some very strong QE promises to stop the euro breaking $1.40. The more Draghi ties himself in to QE the more the walls close in on the central bank president with only visible escape route meaning giving up credibility, the only thing that has gotten us through the Eurozone crisis so far.