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Risk aversion returns

Published: 13 Mar at 10 AM Tags: Pound Sterling, Euro Exchange Rate, New Zealand Dollar Exchange Rate, Forex, Euro Crisis, UK, Inflation,

A mixture of a heightening of political tension in the Ukraine and some poor trade data out of China reversed the markets back into risk aversion yesterday.

Ukrainian Prime Minister Arseniy Yatsenyuk met with US President Barack Obama yesterday ahead of the looming Crimea referendum due to be held on 16 March. The referendum will allow Crimean’s to vote on whether or not to split from the Ukraine and join Russia but the G7 group of nations have already announced that they will not accept the outcome of the vote and have threatened further sanctions on Russia. Ahead of Sunday’s vote, reports indicate that Russian forces are continuing to increase their presence on Ukraine’s eastern border after having already taken control of the Crimean peninsula.

Meanwhile, the latest data out of China revealed a surprise trade deficit in February as exports slumped. In addition, the latest data out on domestic spending and industrial output has come in worse than expected. The combined industrial output for January and February rose by 8.6% year-on-year, far worse than the forecast 9.5% and combined retail sales for the same period was up by 11.8% year-on-year, missing expectations for an increase of 13.5%.

The pound is still suffering the effects of the latest call from the Bank of England, this time from Deputy Governor Charlie Bean on Monday that any further increase in the value of the pound could harm exports and therefore endanger the economic recovery. The pound is now back trading at a 2 month low against the euro.

Overnight, the Reserve Bank of New Zealand (RBNZ) opted to raise interest rates by 0.25% to 2.75% and signaled further rises until early 2017. The RBNZ has become the first central bank of a developed western nation to raise rates since the US Federal Reserve started to tighten policy in December 2013.

RBNZ Governor Graeme Wheeler said in a statement “Inflationary pressures are increasing and are expected to continue doing so over the next two years. In this environment it is important that inflation expectations remain contained. To achieve this it is necessary to raise interest rates towards a level at which they are no longer adding to demand."

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