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Ukraine Uneases Markets & Fed Testimony Day

James Boston
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The escalating situation in The Ukraine is contributing in no small part to a heightening of the risk factor present in the markets. Russia’s military exercises near the Ukrainian border have prompted warnings from Washington that intervention would be a ‘grave mistake’. US action is certainly not on the cards but that hasn’t taken from a raised level of nervousness in the markets.

The flow of investment funds to the traditional safe haven assets of Gold and the Swiss Franc has increased noticeably over the past 24 hours. The Russian Rouble plunged to a lifetime low against the Euro and the weakest level it’s seen against the US Dollar in over 5 years. Emerging market currencies are suffering across the board while global stock markets have broadly retraced.

The US Dollar is a major beneficiary of this uneasiness as money leaves riskier assets and finds its way into the relative safety of US Treasuries. It will be interesting to see how the Dollar holds up later today as US Federal Reserve chair, Janet Yellen, goes in front of the Senate for her second congressional testimony since taking over at the Fed.

There is no real expectation that the Federal Reserve will deviate from the well rehearsed message of a gradual reversal of loose monetary policy when economic conditions warrant such. However, the interesting aspect of today’s testimony will be Yellen’s reaction to the disappointing US data that we have been seeing of late. There is no reason to believe that the recent soft figures will prompt any action from the Fed in the near term, but Senators will question Yellen as to what plans are in place should conditions deteriorate significantly further.

A second valid question likely to be asked of the Fed chair is whether there are concerns around the possibility of the Chinese Yuan being allowed to depreciate against the US Dollar. If Yellen remains true to her predecessor’s form, she is likely to offer a non-committal response to both of these questions, but there still remains the possibility, however slight, that a new Fed chair may bring a new style.

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