FX CONCEPTS!

GLOBAL MACRO RESEARCH

EQUITIES
!

! !

CURRENCIES

INTEREST RATES

COMMODITIES

MARKET INSIGHT REPORT

Donetsk Is Russian Now - whoops!

March 20, 2014 By John R Taylor, Jr. Chief Investment Officer ______________________________________________________________________ Dont believe the markets. They darted off last week and are calm now, like a school of fish. The Crimean issue is not over. These geopolitical issues are dated in years, decades, and even centuries. The chaotic events of the past weeks using that word in the scientific sense were just the fracturing of a highly stressed relationship that has developed over the years, certainly since 1954 and 1994 when treaties were signed creating the old status quo. The modern history starts when Ukraine became a separate Socialist state in the USSR. Remember that the Western Powers allowed Ukraine and Byelorussia to have seats in the United Nations even though they really werent independent, effectively giving the USSR three seats. Putin sees Ukraine as part of historic Russia and he is right the further back you go, the more central Kiev is to the whole concept of Russia. But, this really shouldnt matter.!

! Putins actions have launched Russia and the rest of Europe onto a scary, unnerving

course. All of the recent political, military, and moralistic activity is right out of Hitlers playbook the historic lands, the people, the blood, the sacred duty. Worse than the theatrical bits, Germanys timeline is well known: Germany lost World War I in 1918, then it lost the peace (a worse loss?) in 1920, then it went through two economic cataclysms in 1923 and 1931, before Hitler began taking back the lost lands bordering the Versailles-trimmed Germany starting in 1935 culminating in the start of the global war after the invasion and partition of Poland in September 1939. This process, the loss and humiliation in a war leading to anger and paranoia is rational and has happened before. And a reversion back toward the original state, a Thermidor reaction, the first of which brought Napoleon to power in the USSR it brought Stalin sounds like where we are. Now Putin bitterly denounces the West according to The New York Times, claiming his country has been slighted and insulted in an emotional statement steeped in years of resentment and bitterness. His remarks were interrupted repeatedly by thunderous applause and were seen as positive by the global markets as well. We would not argue with the point that many missteps have been made and Russia could rightly feel cornered, but this seems to be the same kind of feeling that a Napoleon or a Hitler sensed in his people. It is a very dangerous emotional high. !

! Donetsk and much of Eastern Ukraine is more Russian than New York is American.

Putin has staked his claim to helping Russian nationals outside mother Russia and his people overwhelmingly approve. It seems the right thing to do: what Russian would want to see fellow Russians, probably friends of friends or relatives, suffer at the hands of some non-Russian? In an emotional situation, already present and being fostered by the crowd, rational thought loses. Just ask Freud. Now neither side is rational, and that includes Washington, London, and Berlin. What has happened is wrong, the 1954 and 1994 agreements say this is illegal, but the overthrow of Ukraines President, with violent clashes and extreme emotional overtones is too. Today, we are on the same march that Germany took 70 years ago. First, the USSR defeated in the Cold War, lost its satellites in 1989, then in 1991 Russia was born losing all the other SSRs. Humiliation was heaped upon poverty and disease; then the economic pitfalls, default in 1998 and the crash of 2008. Minor wars and skirmishes are bringing lost territory back into Russia, of which Crimea is the most recent. It is surely not the last.
To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com

FX CONCEPTS!
CURRENCIES

GLOBAL MACRO RESEARCH

EQUITIES COMMODITIES

! ! CURRENCY Europe Long-Term View !

Different Shades of Gray
By John R. Taylor, Jr

INTEREST RATES

Before today, we have seen Europe as divided into four currency levels, running from the very desirous and light to the most rejected and black. No one of them is actually at the extreme, so let us call them different shades of gray. Our chart to the right shows two currencies representative of the two darkest shades, the Polish zloty and the Russian ruble. !

! The ruble is the weakest as the Russian and

Ukrainian tensions since the end of last year have decreased capital inflows and increased outflows as well as giving investors a negative feeling. The aftermath of Olympic events is almost always negative as well, but this selling has become dramatic with the collapse of the government in Kiev and then the takeover of the Crimean Peninsula with the possibility of financial sanctions to come. Although the ruble has been extremely weak it has followed the same cyclical pattern as the Polish zloty. The difference is the ruble has an upward tilt to its cycles, with dollar up days much stronger than the down days. The picture for the next week had been and probably still will be a slightly weakening dollar with the ruble reaching the 35.50 level at a maximum between now and next Wednesday. By the middle of next week at the latest the ruble should be under pressure again, rising into the week of April 7. Our target for this upmove is the 38.50 to 39.00 area, and this could be a conservative estimate if the political or military situation were to change. !

! Looking back over the past three months, the Polish zloty is almost exactly where it was

against the dollar in the second half of December. The euro and Swiss franc, representative of the second and first group of currencies are up against the dollar, but even they show the same cyclical picture. Poland is a neighbor of Ukraine and also of Russia its Kaliningrad Oblast so Donald Tusk, its Prime Minister, has been talking about ordinary Russians and how he likes them, but that Poland is very firmly against their countrys activities in the Crimea and how it is a firm backer of the Ukraine, with which it has been closely related for a thousand years and more. Poland is part of the EU and NATO and is courting the US and Germany, with whom it has a very tight economic relationship. The zloty might not trend the same way against the dollar as the euro, but its correlation is very tight. Yesterday, we wrote in EUR/PLN to Trend Higher into May, that the zlotys financial and economic exposure to the central and eastern European countries and its dropping interest rates would cause it to drop fairly consistently against the euro between now and the first half of May. !

! The picture for all of Europe should be one of weakening against the dollar over
the next seven weeks. We had been expecting the European currencies to peak against the dollar next week and there still is a chance we will reach a new high at least for the euro or the Swiss franc by next Wednesday, but we now see a decline starting from this level and taking these currencies down into the week of March 31 to May 7. This low could be a major one followed by a European rally into Q4.

To contact FX CONCEPTS New York: 1 (212) 554-6830; London: +44 20 7213 9600; Singapore: (65) 67352898; research@fx-concepts.com