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Talk is cheap; the price of action is colossal That line, from the play Marat/Sade, pretty much sums up the European position on Russia. Many government officials have been talking harshly about the need to penalize Russia for its alleged involvement in the downing of the Malaysia Air plane over Ukraine, but when push came to shove, nobody shoved. The EU increased the list of people and companies facing asset freezes and travel bans, but said they would consider tougher measures only if Russia doesn’t cooperate in the investigation of the plane. The European Commission is now expected to publish tomorrow a list of harsher economic and trade sanctions that the EU could implement if things don’t go well.

This may not have been a great day for standing up for principle, but markets are generally apolitical. The fact that tensions were lowered switched sentiment from “risk off” to “risk on.” Stocks in Europe recovered smartly and the rally carried over into US and Asian equities too, while gold and Bund prices fell. The risk-sensitive commodity currencies were the best performing G10 currencies while the safe-haven CHF was the worst.

Against what should have been a favorable background for European assets and hence EUR, it’s particularly notable thatEUR/USD is opening in Europe below 1.3500 for the first time since 3 Feb (and even that was only one day; the last time it was down here for any sustained period of time was last November). The weakness seems to be caused by the view that European growth has stalled and with the ECB on hold, the only thing that can rescue Europe is a weaker euro. For example, even while the IMF declaring that Spain has “turned the corner,” the country’s exports are falling and the trade deficit is widening out again, endangering the recovery. We will know more tomorrow when the preliminary PMIs for July are released. The Eurozone PMIs are forecast to be only a touch weaker, so there seems to me to be plenty of room for disappointment. Meanwhile, the technical picture for EUR/USD is also negative (see below). This could be the break we EUR bears have been waiting for for so long.

On the other hand, EM currencies continue to gain. RUB was the best-performing EM currency of the ones we track, followed closely by the high-yielding TRY, ZAR and BRL. EM currencies may be benefitting from the capital flight from Russia as investors (and locals) pull out of that market and put their money elsewhere. Carry trades look set to perform well even if “risk off” returns, because of the lack of contagion to other EM countries.

Q2 CPI from Australia was in line with forecasts at +3.0% yoy, up slightly from +2.9% yoy in Q1. The news sent AUD sharply higher despite the fact that the headline figure and “weighted median” were exactly as forecast, because the “trimmed mean” figure rose faster than expected at 2.9% yoy, up from 2.6% yoy and exceeding estimates of 2.7% yoy. The higher inflation rate makes it less likely that Australia might cut rates in the foreseeable future.

Today: During the European day, the only data we get are manufacturing confidence data from France and the preliminary consumer confidence for Eurozone, both for July.

In the UK, the Bank of England releases the minutes of its latest policy meeting. Recent comments and speeches by MPC members, plus the minutes of recent meetings, indicate that at least some members have moved closer to a dissenting vote, but I doubt that it will come this month. With no outright dissent, the focus will be on the range of views on spare capacity among MPC members and the debate about when to start raising rates. Separately, BoE Governor Mark Carney will speak to a business conference.

From the US, we get the MBA mortgage applications for the week ended on the 18th of July and as usual no forecast is available.

In Canada retail sales for May are expected to slow to +0.3% yoy from +0.7% yoy in the previous month.

ECB Executive Board member Peter Praet speaks.

Wednesday, 23 Jul, 2014 / 8:08

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