Power And Dollar

Pricing The Risk of Georgia-Russia Conflict

Russia and Georgia are engaged in a military conflict over the South Ossetia.  Georgia is not an oil producing country.  Therefore, the oil price is not affected, yet.  The US dollar is appreciating against all currencies (GBP, CNY, INR, EUR, AUD, CAD, JPY, CHF).  This USD appreciation actually contributed to the price fall in all base commodities: gold, oil, copper, everything.  There is no indication that the political risk posed by this military conflict has been priced in the oil market yet.  The political risk may be being priced into the currency market alone, for now.

 

First of all, why didn’t the bad unemployment news sink the USD further?  Well, the world is gloomy right now.  The US happens to be not as bad, that’s all.  

 

The appreciation of USD, using CNN’s figure, is 0.59% while the price drop of oil is 3.47%.  This price drop is more than adjusting the currency fluctuation.  The market has priced in something else, but definitely not Georgia conflict.  Hot money still has to go somewhere.  It has been slowly moving back to the stock market for weeks.  Thus, growth stock got a better boast than the rest of the market.   Therefore, how much of the stock price is supported by fundamental versus by parking availability is very questionable.  

 

Georgia is not oil producing country.  However, the tradition is when there is a major conflict, oil goes up and USD goes up since every economic fundamental is questioned.  However, this is not yet the case.  Maybe the market needs to first work out the oil price.  After all, oil has been high for so long. 

 

Another reason why this has not been priced is there is no reaction against Russia, the oil producing party of the conflict, yet.  Recall Russia jumped its gas price over Ukrain?  Maybe the Georgian conflict will be a forgotten item.  The only caution is this area is close to Turkey and Caspian Sea.  So, depends on where the pipes actually are, the political risk can get factored into the oil price as the conflict enlarges its theater.  Some of price drop can be attributed to demand destruction since aggregate demand, especially commodities, takes a long time to change.  The duration of high oil prices may actually have shifted demand for oil.

 

The interesting part is actually the currency exchange rate.  If we look at the change in exchange rates, then we see that the closer the country is to the conflict zone, the more USD appreciates.  Go check google finance.  This is ranked order of USD appreciation against other currency: EUR, CHF, GBP, CAD, JPY (at least at the time it is written).  Looking at the price differential at day end may give a hint where this risk is going.  Of course, Euroland’s fundementals are priced in as well.

 

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August 8, 2008 - Posted by | Current Events, economics, Money, opinion, politics, wordpress-political-blogs

1 Comment »

  1. […] Prices News » News News Pricing The Risk of Georgia-Russia Conflict2008-08-08 23:12:48Be are, the pipes actually are, the political risk can … pipes actually are, […]

    Pingback by News · Gas Prices News | August 8, 2008 | Reply


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