Tis the season to talk turkey. Many American’s are likely dining on left-overs after a sumptuous turkey dinner with all the trimmings; at least those not out Black Friday shopping. In financial markets, Turkey is all the talk as well.


Turkey deliberately, and as of this writing, unapologetically, shot down a Russian SU 23 fighter jet that ostensibly encroached in its airspace. Russia is extremely irked. However, both countries promised not to go to war over the incident. Maybe not a shooting war but no one said anything about a trade war. Russia is preparing wide-ranging sanctions against Turkey that may include tourism bans and a halt to agricultural imports. Those sanctions would also hurt Russia as Turkey is a major trading partner. Turkey hasn’t announced their response.

By itself, the Russia/Turkey spat should have little to zero impact on G-10 markets and currencies. Unfortunately, it’s the knock-on effects that are destabilizing. Russia is Syria’s major ally while Turkey is totally opposed to Syria’s President Bashir al-Asaad. NATO is closely allied with Syrian Kurds in their war against ISIS. Turkey is extremely unhappy with the rise and strengthening of the Kurdish population fearing that they may unite with Turkish Kurds and create problems domestically. And now, in the aftermath of the vicious terrorist attacks in Paris, Russia is being warmly embraced by France, a key NATO member. The French opinion seems to be that Russia has been the most proactive and effective response to ISIS in Syria. Can you say “dog’s breakfast”?

The Turkey/Russia feud is a good reason to elevate the risk aversion threat level to Yellow. If allowed to deteriorate, NATO alliances could turn the feud into something like Eastern Europe, circa 1914. Safe haven currencies (CHF, JPY and USD) would be in demand, oil prices would skyrocket on supply disruption concerns and the euro would tank. In fact, it would probably spell the end of the single-currency. The point is that regional political issues have geopolitical consequences which traders need to be aware of.

In December, these consequences are magnified.

What makes December so special? No Virginia, not Santa Claus. Liquidity, or more accurately, a lack of liquidity. December is not just the end of the calendar year, it is the fiscal year end for many financial institutions, funds and corporations. FX risk positions by global banks have been declining since the Volker Rule and those banks that have both risk positions in FX and a December year end tend to reduce their activities dramatically to avoid any negative shocks. No trader wants to jeopardise his or her bonus by getting caught the wrong way in a wonky market. That lack of liquidity exacerbates price moves.


For example, a US corporation with a desire to repatriate profits from its Canadian subsidiary may decide to sell $1.3 billion dollars to buy US dollars. Depending upon the style of execution, the time of the day, and the day of the month, USDCAD could climb anywhere from 0.0050 points to .0150 points in a matter of minutes. That kind of move has a domino effect on various types of orders and options which could really exaggerate a price swing.

Now imagine that move when simultaneously a headline announces “Turkey threatens Russia with military action” or vice versa. .0150 points would become .0450 points, easily.

The Russia-Turkey spat isn’t the only flash-point. CNN money listed 5 potential hotspots in a story on November 25th.

The Islamic State of Syria and Iraq: ISIS has proved, with its action in Paris, a willingness to bring terror to Main Street, Anywhere. The effects of their actions on FX markets are usually short –lived but that could change

Russia and Ukraine: Somebody turned the lights out in Russian controlled Crimea and all the fingers are pointing at Ukraine nationalists. Russia may have pulled back from actively supporting and encouraging Ukraine rebels but they are only a grenade launcher away.

South China Sea: So far China has gotten a pass. They are claiming everything in sight and no one has stopped them-yet. The self-proclaimed Middle Kingdom has laid claim to the South China Sea, much to the chagrin of Taiwan, Philippines and Viet Nam. This week, the Philippines are in the World court in The Hague to refute China’s claims. The US doesn’t support China and has provocatively sent warships into the disputed waters. Whatever could go wrong?

Iran, the Middle East and Israel: Israel is a tad less enamoured with the Iran nuclear deal than US President Obama. In addition, Israel has taken umbrage of Iran’s stated objective of wiping Israel off the earth.

State sponsored cyber-attacks: China, Russia and Iran have all been accused of intensive cyber-attacks on western institutions. The west, of course is not an innocent in these cyber-wars and has been accused of hacking into Iran’s nuclear program and uploading a virus. That problem is not going to go away.

There is no need to head for your underground bunker and wait for the apocalypse. None of these potential risks are of the “end of the world” variety but they pose enough risk that prudent financial managers must be aware of them. And if any of these issues come to fruition in December, the effect will be magnified. Forewarned is forearmed.

By David Marks, Agility Forex FX Analyst