EURO, SWISS FRANC, EUR/CHF OUTLOOK, RUSSIA-UKRAINE TENSIONS – TALKING POINTS
- The euro is vulnerable to a quick selloff if Russian-Ukrainian tensions continue to escalate
- The Swiss franc could rise; political risks could drive Europe’s anti-risk currency
- The Nord Stream 2 gas pipeline is a key political lever. Could sanctions drive up oil prices?
The euro could suffer if tensions between Russia and Ukraine boil over and destabilize European politics and economic dynamics. Local stock markets would likely experience a selling crisis, although some stocks might get a bump. The anti-risk Swiss franc, on the other hand, could rise amid instability, as it often did during times of European political turbulence.
Natural gas and crude oil prices could ride the tide of politically induced supply disruptions if economic sanctions are put in place against Russia. This would reinforce the increasingly optimistic outlook for these key inputs amid recovering global demand. What then are the political variables that could support or derail this outlook for the Euro, Swiss Franc and Crude Oil?
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PLAYING WITH FIRE: NORD STREAM 2
The Nord Stream 2 pipeline continues to be a political and economic wedge between the United States and its European allies. For Washington, there are fears that this will give Moscow excessive leverage over the German economy (the so-called “steam engine of Europe”) and that of the region as a whole. As a result, it could make European foreign policy towards Russia softer and weaken US efforts.
Source: BBC News
On the other hand, Germany and Europe as a whole continue to struggle with soaring energy prices. If approved, the Nord Stream 2 pipeline would supply 55 billion cubic meters of gas to Germany each year and drive down prices in an overall inflationary environment. These competing priorities are at the root of the tensions between Russia, the United States and Europe.
Poland and Ukraine also express unease at the idea of not collecting transit fees by allowing Russian gas to flow through their territories. According to Congressional Research Service, prior to the completion of Nord Stream 1, “about 80% of Russia’s natural gas exports to Europe passed through Ukraine. In 2019, around 45% of these exports transited through Ukraine”.
Although the pipeline is complete, operational certification has not yet been issued. That said, analysts expect regulators to approve a license between March and July 2022. Washington has openly said it could take advantage of sanctions against Russia if Moscow sends troops over the Ukrainian border, and some of them target Nord Stream 2:
“Section 232 of the Combating Russian Influence in Europe and Eurasia Act of 2017 (CRIEEA, PL 115-44, Title II) authorizes sanctions against those who invest $1 million or more. dollars, or $5 million over 12 months, or provide goods, services, or support valued at the same amount for the construction of Russian energy export pipelines (22 USC §9526)” – SCR.
US sanctions could trigger countermeasures from Russia in the form of gas and oil supply restrictions, potentially sending energy prices soaring and further fanning the flames of the EU. inflation. According to Kevin Book, managing director of ClearView Energy Partners, Russia’s vast resources mean it can “drill a bigger hole in supply than the West can plug.”
EURO OUTLOOK CHANGES ON UKRAINE TENSION
As for the Euro, a dispute between the United States and Russia over Ukraine involving Europe could increase selling pressure. A military confrontation of any kind between the two would in itself dampen global risk appetite, but the regional proximity of the conflict could exacerbate a sell-off in local assets, such as the euro.
HIGHEST POLITICAL RISK SCORE IN RUSSIA RECORDED
From the Data Editor: “Geoquant merges political science with computer science to generate systematic and objective indicators of political risk across the G20. Political risk scores draw on hundreds of structural measures of country risk, as well as more frequent and larger-scale data from reputable formal and social media. The metrics consist of over 250 high-quality country risk databases produced by multilateral institutions, NGOs, think tanks, government agencies, polling companies/organizations, and social science literature. A higher score indicates greater political risk.
Conversely, the Swiss franc could then benefit from a rise from risk-averse traders amid political peril. German Bunds would almost certainly rise at the expense of domestic stock markets. EUR/CHF could therefore experience a double tension due to the selling pressure on the euro which pushes it down and the purchasing power which pushes the Swiss franc up.
EUR/CHF TECHNICAL ANALYSIS
EUR/CHF has been trending lower since March 2021, with a brief respite between August and September along the way. After hitting a seven-year lowRecently, the pair has bounced back quickly and is now showing the first signs of a bottom.
Chart Showing EUR/CHF – Daily Chart
Source: Trading View
The first critical point of resistance appears to be the 1.0511 high (golden dotted line) where the pair fell sharply in mid-January. Retesting this ceiling without a follow-up could represent a confluence of bearish signals, both fundamentally and technically. This could then keep EUR/CHF under pressure in the short to medium term.
Written by Dimitri Zabelin for DailyFX