Turmoil Spreads in Ukraine

Fighting in Ukraine is now broad based and the central authorities have little control as the country edges to the brink of civil war. Early FX moves have been small; last week NZD led and AUD lagged. We look at the BOE's options and the latest positioning data.

The deaths three dozen pro-Russia activists in Odessa Friday probably marked a turning point in the Ukraine conflict. Fringe movements have grown organized and grievances have been stoked. We don't see any likely path toward normalization and a long period of instability is ahead.

At this point, most of the damage is priced into markets. The Ukraine is a miniscule economy and so long as Cold War politics don't escalate, the risks are contained.

So the markets will turn to economic data in the week ahead that includes the ECB, BOE, ISM non-manufacturing, US & Eurozone CPI and the Australian employment report.

The Bank of England has been a focus as expectations of a rate hike sometime around Q3 2015 mount. The pound was the best performer in April but consider Carney's playbook at the BOC before betting he will hike rates to cool off the housing market. In Canada, he lobbied the government to tighten mortgage rules and the FT reported on Sunday that new housing regulations are under consideration.

If the BOE is successful in cooling the home market without tightening policy, it may push out expectations for hikes and cool cable as it tests the 2009 high and the 100-month moving average.

On the weekend, China released the non-manufacturing PMI and it showed a slight expansion to 54.8 from 54.5 in March. Later this week China releases trade balance.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

• EUR +26 vs +26K prior
• JPY -70K vs -67K prior
• GBP +44K vs +48K prior
• AUD +11K vs +16K prior
• CAD -30K vs -35K prior
• NZD +18K vs +20K prior
• CHF +14K vs +14K prior

The market was hesitant to switch out of positions ahead of all the data that came later in the week. One spot where traders were backpedaling was in AUD, where positions had been building for several weeks.