Safe Haven War : CNH, CHF and EUR

20/07/2014 by

It could get ugly next week.

Markets ended Friday on a high, post Thursday plane crash, and oblivious to further geopolitical drama to unfold.

Well, it may not be smooth sailing after the latest news that rebel insurgents have taken away all 196 recovered bodies from emergency workers and global anger mounts against Russia, widely seen as the perpetrator and missile supplier. http://www.telegraph.co.uk/news/worldnews/europe/ukraine/10974050/Malaysia-Airlines-plane-crashes-on-Ukraine-Russia-border-live.html

Commercial planes do not often get shot down by missiles. An irony that may have escaped some is that the most recent one preceding Thursday’s attack, was a Siberian airline flight, gunned down by the Ukrainian army accidentally back in Oct 2001. http://www.vox.com/2014/7/17/5912699/7-times-militaries-have-shot-down-civilian-planes

Even Malaysia’s Prime Minister lost a relative in this tragedy which demands reprisal and restitution of sorts.

An eye for an eye and let justice be served, except that it is just a little hard for Malaysia to do anything to Ukraine or Russia, being half a world away. This highlights the importance of allies and global champions like the US, with the naval and military power to take the fight to anywhere in the world. And thus, the importance of having America as a friend.

Egypt (America’s friend) can probably get away with murder (over 680 rebels sentenced to death back in April for the killing of 1 police officer) and escape with just expressions of dismay globally as America continues to supply military aid money. http://www.huffingtonpost.com/neil-hicks/kerrys-remarks-in-cairo_b_5527355.html

It pays off to be America’s friend and Syria, whom America nearly invaded last year, is now an ally against the ISIS insurgents wreaking havoc in Iraq.

With the threat of the first wave of reprisals, we should be expecting additional trade embargoes, asset seizures and economic sanctions. Typically, safe haven currencies and assets would be in demand. But the question is what is safe haven ?

The USD is the usual suspect, along with Gold and the Swiss Franc (no more because it is now pegged to the EUR). With Russia involved, Gas prices too. Because most trade is still conducted in USD and if it does escalate into military conflict, America is most likely to win which means USD is a safe bet as well.

However, it is unsafe for Russians to be holding anything but physical USD dollars in the case for the USD. The electronic USD would be subject to scrutiny and this includes anyone conducting business with a country under sanctions, like the case of Stanchart conducting business in USD for Iran, Libya and Sudan a few years ago.

I have a theory that it is the reason why we are not seeing the usual dash for USD this time round, mainly because the attraction of the USD is reserved for friends of America like I said earlier. https://tradehaven.net/market/fx/market-thoughts-are-you-americas-friend-or-foe-usd-is-not-cool/

The DXY Index attempted to break up 2 days in a row, but closed lower each time.

If I had to hazard a guess, the practical currencies to hold would be the neutral countries that run a decent surplus (not to be affected by import prices) and are internationally accepted for trade and I find myself looking at CNH.

China is most likely to stay out of this Russian altercation, not having Chinese on board the ill fated flight, although they had it bad on the MH370 (with 153 Chinese nationals on board) disappearance just less than 3 months ago.

For all the other majorly used and traded currencies of the world, AUD, JPY, GBP, CAD and EUR, are likely to maintain solidarity with the US against Russia.

Russia will just have to import more Chinese oranges, cars and computers because I found Russia does not really import much food.

EUR will be the second most practical currency in demand given that 24 countries in Russia’s vicinity are on the EUR and whilst broad based sanctions can exist, there will be means to circumvent somehow, somewhere. Also, given the CHF peg to the EUR, the Swiss franc safe haven bet comes with the price tag of EUR strengthening.

In the case for short term military action, we shall have the customary spike in Gold and Oil prices and the EM position unwinds. But these are usually shorter lived than the duration of the conflict and a “buy on rumour, sell on fact” trade.

Thus I see a good chance for CNY strengthening in the medium term, towards 6.15 USDCNY(H) as the Japanese withdraw home, as they usually do doing a crisis, for USDJPY to break under 101. CNY trade wins on carry of 2.6% over JPY at nothing.

USDCNH

USDJPY

And finally, EUR is a buy on dip (target 1.36 and no chart for this one) although it goes against my conviction and my cries for EUR carry trades and my call for 1.35 was breached last Friday. https://tradehaven.net/market/fx/market-thoughts-rattling-and-humming-away/