Putin’s War Games Boost USD and Gold

Market View – MahiFX

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Putin’s military aggression boosts USD and Gold

Heightened political disputes and wars tend to add a huge amount of unpredictability to the markets, and this week’s events in the Crimea have proved to be no exception. It has fuelled risk in the currency markets, driving scared investors towards safe havens such as the USD and JPY.

At the outset of the week, when it looked as though Russia might invade the rest of the Ukraine, safe havens such as USD, JPY, and gold were in high demand, while riskier assets plunged.

Putin brings some shine to gold
Putin brings some shine to gold

The easing of tension on Tuesday that came with the withdrawal of troops (except in the Crimea) saw both safe haven currencies fall back in response.

In securing control of the Crimea, Russia may well have achieved its aims. The region is home to the Black Sea naval fleet and is a major Russian military asset, and Russia may have been worried that a pro-EU Ukraine would have threatened its ability to operate in the Black sea and the Mediterranean theatres.

Although the situation could yet degenerate into a major global crisis, the objections of Western countries would appear to be little more than sabre-rattling, and it is unlikely that they will want to be drawn into a conflict with Russia. Aside from anything else, it would create tensions with the large Russian minorities in Poland and the Baltic states.

With the situation as it stands, USD, JPY and gold are obvious holdings for traders and investors until the situation settles down one way or another.

Putin may be just getting started

Even if the situation in the Ukraine drops from the headlines over the next few weeks, it is unlikely to signal the end of Vladimir Putin’s geopolitical ambitions. If anything, success in the Ukraine will encourage Putin – already emboldened by his 2008 victory over Georgia, which led to the creation of Russian protectorates Abkhazia and South Ossetia – to pursue a hawkish strategy going forward.

In Syria Russia seems to have got the upper hand over the West by managing to keep the regime of Bashar al-Assad in place. The post-Iraq and Afghan war fatigue has made Western states reluctant to interfere in foreign wars, and Russia now seems to be exploiting this exhaustion to further its geopolitical aims.

We may see similar incidents in other central Asian countries that have Russian minorities that need ‘protecting’, such as Kazakhstan and Uzbekistan. This was the pretext for Russia’s military interventions in the Ukraine and Georgia, but it is clear that Putin wants to rebuild much of Russia’s former sphere of influence, which crumbled when the USSR collapsed.

It’s another factor playing to geopolitical instability. Spikes in international tensions such as in the Crimea will see USD quickly come in demand.

For JPY the situation is more nuanced. A rising JPY could quickly feel the wrath of the Bank of Japan, which is determined to keep the currency weak. A prolonged period of international instability would no doubt see the Bank of Japan doing whatever it takes to weaken JPY potentially leaving traders with stinging losses.

That leaves USD and gold as favoured long-term safe havens.

By Justin Pugsley, Markets Analyst MahiFX
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David and Susan Cooney of MahiFX

MahiFX is headed by David Cooney, former global co-head of currency options and e-FX trading at Barclays Capital and responsible for the award winning e-commerce platform BARX and Susan Cooney, former head of e-FX Institutional Sales in Europe for Barclays Capital. Operating as a market maker, MahiFX provides traders direct access to institutional level execution speeds and spreads through its proprietary-built fully automated pricing and risk management technology, lowering the cost of retail forex trading.

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