Talking Points:

Yen Rally May Resume as Russian Crisis Fears Fuel Renewed Risk Aversion
Tepid Uptake on Second ECB TLTRO May Further Sour Market Sentiment
SNB Policy Announcement May Not Spark a Strong Swiss Franc Reaction

The Japanese Yen underperformed overnight, sliding as much as 0.5 percent against its top counterparts. The move appeared corrective following yesterday’s aggressive advance. The currency rose the most in 18 months against the US Dollar and scored considerable gains against the Euro and the British Pound. As we detailed in our weekly forecast, Yen gains look likely on the back profit-taking on“risk-on” exposure ahead of the calendar year turn.

Emerging-market jitters may amplify liquidation. A monetary policy announcement from the Central Bank of Russia (CBR) is expected to see policymakers raise the benchmark lending rate by 100 basis points to 10.5 percent. The move would follow a similarly dramatic 150 basis point hike last month. Officials are desperately trying to stem the slide in the Ruble, which is hovering at a record low against the greenback and helping fuel a dramatic pickup in inflation (now at a 3.5-year high of 9.1 percent).

Fighting the Ruble rout is becoming increasingly costly for Russia, particularly at a time when sinking oil prices are already putting pressure on government finances. Energy sales account for two-thirds of Russian exports, with many of the companies in question controlled by the state. In the meantime, FX reserves have slumped to the lowest level since October 2009.

If this rate hike is shrugged off as easily as the last, investors will be left with two plausible scenarios. The first sees Russia continue to throw money at the problem, bringing the country closer to a potentially disastrous budget crisis. Indeed, sovereign CDS spreads show fears of a Russian default are at their most acute in five years. Alternatively, the Kremlin could resort to capital controls to stem outflows punishing the currency (as we discussed last month).

This possibility is being priced in as well. RUB-denominated bonds traded in Moscow now command a substantial premium over equivalents cleared out of London. This means investors are demanding to be compensated for the risk of being unable to get money out of Russia should capital controls take effect.

Needless to say, neither alternative bodes well for risk appetite. With sentiment already on the defensive, a lackluster response to the CBR rate hike that fuels fears of Russia-driven market dislocation may markedly accelerate the exodus from risky assets. That will probably drive the Yen ever-higher and may put pressure on confidence-geared FX including the Australian and New Zealand Dollars.

As if this were not enough, the European Central Bank is set to announce the size of its second TLTRO operation. Mario Draghi and company have thus far failed to meaningfully grow the ECB balance sheet this year with a prior TLTRO allocation as well as ABS and covered bond purchases. Tepid uptake on today’s allotment may amplify Eurozone deflation fears, representing yet another headwind for risk trends.

Elsewhere on the docket, a policy announcement from the Swiss National Bank may not generate a strong response from price action. Last month’s gold referendum passed without forcing policymakers to change the way they administer monetary policy, meaning the central bank is unlikely to reach beyond a re-statement of the familiar commitment to maintain a EURCHF floor at 1.20 in the near term.

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Asia Session

GMT

CCY

EVENT

ACT

EXP

20:00

NZD

RBNZ Interest Rate Decision

3.50%