Bullets Fly in Ukraine, Unto China GDP

The trade has been to ignore Ukraine until the bullets started flying, well on Tuesday they began to fly and it caused a bout of risk aversion. The US dollar was the top performer while the yen lagged. Chinese GDP is a major risk in the hours ahead.

Tuesday was a busy day in markets. The initial focus was on US CPI (slightly high) and the Empire Fed (soft) but quickly shifted to Ukraine. On the weekend, pro-Russia separatists captured about a dozen government buildings in Eastern Ukraine. The government pledged a military response and delivered it by retaking an airfield.

Reports suggested 11 men were killed in the operation and a Ukrainian general said it was only the first step. Putin responded that the crisis had been “sharply escalated” and said the actions were unconstitutional.

The yen rallied as the headlines tricked out, sending USD/JPY down to 101.50 and EUR/JPY to a one-week low.

A turnaround began when Nikkei reported that Japan's government will downgrade its economic assessment on Thursday for the first time since 2012. The move could be the first step towards further easing.

USD/JPY rebounded back to 101.90 and it was assisted by a turnaround in US stocks. The Nasdaq touched the lowest since November but reversed to close slightly higher.

The Australian dollar was soft as commodities slumped. The World Gold Council reported on gold stockpiling for the shadow banking system in China and that sparked a quick $40 drop in gold. The government cracked down on similar stockpiling in copper last year, leading to a persistent selloff.

The focus will remain on AUD in the hours ahead with China set to report on industrial production, retail sales and Q1 GDP – all at 0200 GMT. The consensus is for 1.5% q/q growth, which is a modest 6% annualized pace. The collapse in trade numbers at the start of the month could be a negative but the trade balance was strong and that may add an upward bias. Any miss will immediately hit the Australian dollar and it could prove to be a lasting move.