Playing Russian Roulette

03/18/2014 9:00 am EST

Focus: FOREX

Mike Kulej of FXMadness.com offers his take on what the current standoff between Russia and the West over the Crimean secession referendum could portend for currencies.

By all appearances, we are in for an interesting week for financial markets. Of course, at the top of the economic calendar for the period is the regular policy meeting of the Fed, the first one chaired by Janet Yellen. While nobody expects immediate policy change, all markets observers will look for hints about future adjustments. The committee will probably stick to the current tapering plan of $10 billion a month. Anything else will be viewed as a surprise, with currencies responding with a spike in volatility.

The Fed meeting, however, could take a back stage to the unfolding geopolitical event, namely the Crimean referendum. The EU and the USA imposed more economic sanctions on Russia. This round could be followed by more pressure later in the week. Interestingly, to date Russia simply ignored these threats, as if they were meaningless. They may be preparing for longer-term economic pressure.

Last week, over $100 billion in US Treasury securities were withdrawn from custodian holdings at the Federal Reserve, the largest such outflow on record. It does not mean that somebody dumped these securities, but they were moved to another financial center. Given the amount involved, it must have been a foreign central bank. Many suspect it was Russia moving its holdings somewhere where they cannot be frozen by economic sanctions. This suggests escalation of hostilities, because so far western countries have not even mentioned freezing of national assets. Obviously Russia suspects that will be the next step, meaning they are willing to go the distance, at least economically, on this one. Personally, I find their relative silence on the issue more telling than counter-threats. Would not be surprised in the least if they were willing to turn the gas/oil spigot off for some time, if for no other reason than to create shakeout in financial markets. Or just turn the flow of these materials to China. Sure, Russia cannot afford to lose income from these resources for long, but even a short-term action would create significant market uncertainty and volatility.

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I am looking at the one-hour chart of the NZD/USD, thinking it has more room to move lower. This pair sold off on Thursday but consolidated on Friday, creating a trading range. Realistically, the price can move either way, but I am interested in shorting it at 0.8512, targeting 50 pips. Outside of this example, I do not see the kind of chart patterns I like, so hopefully, currencies will go through some gyrations this week and form situations I find suitable.

By Mike Kulej of FXMadness.com

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