Risk aversion was the dominating sentiment at the start of the week as geopolitical tensions rose with the Western allies pondering military action against the Syrian Government. Tensions in Syria have escalated since President Bashar al-Assad’s government allegedly used chemical weapons in an attack on civilians.
In a news conference showing the most forceful reaction since the start of the Syrian conflict between the government and rebel forces, US Secretary of State John Kerry said President Barack Obama was consulting with US allies on how to respond to the attacks. In the meantime Russia, Syria’s strongest ally, has urged Washington not to use military force against Assad’s government.
Increasing tensions and concerns, together with uncertainty over the possibility of a military attack, sparked a broad outflow from riskier assets, pushing world share prices lower and driving safe haven currencies, such as the Japanese yen and Swiss franc, higher. Commodity prices were given a boost, with gold stabilising above the $1,400 mark and crude oil rising towards a five-month high.
Emerging markets were among the worst hit amid growing concern over the situation in Syria. Financial markets in emerging economies have already been under pressure over the past few weeks due to speculation that the US Federal Reserve will start tapering its record stimulus from September, as investors position themselves for an end to availability of cheap cash.
The safe-haven yen and Swissie rose sharply on Tuesday, while higher-yielding currencies such as the Aussie and Kiwi plunged lower.
The Nipponese currency was up around 1.30 per cent against its major rivals on the week by the time of writing. Government bond prices in Germany, the US and Great Britain also rose as investors favoured safe-haven assets. Asian and European shares were under pressure on Tuesday, tracking Wall Street shares’ decline from the previous day.
USD/JPY dropped to 97.60, edging further away from a three-week peak hit on Friday. EUR/JPY fell 160 points to 130.13 by the time of writing, wiping out all gains from the previous week. EUR/CHF fell around 0.40 per cent to 1.2285 and USD/CHF slipped to 0.9183.
Growth-linked currencies like the Australian dollar were under severe pressure as investors shunned away from taking risk and emerging market currencies tumbled. The Aussie shed almost 0.80 per cent against the dollar and more than 1.50 per cent versus the yen.
AUD/USD inched closer to a three-week low on Tuesday, dropping to 0.8934, and within sight of a three-year low by 0.8848. AUD/JPY also came just pips away from its three-week trough, hitting 87.42. The kiwi was the biggest loser as NZD/JPY fell 1.80 per cent to 75.69, its lowest since June 26.
Initially at the start of the week, the euro was resilient to the geopolitical concerns affecting currency markets. The single currency held close to 1.34 versus the greenback as forex investors awaited the IFO German business climate index, which was expected to show that confidence rose for a fourth consecutive month. The actual figure of 107.5 beat expectations for 107.0. EUR/USD initially spiked towards the session high of 1.3390, but tumbled soon after to 1.3322.
Emerging markets were among the worst hit amid growing concern over the situation in Syria
Over the last few weeks the US dollar has been supported broadly at the expense of emerging market and growth-linked currencies. Forex investors spurned emerging currencies amid concern that the Fed will scale back on its record easing policy, and economies which have been supported by cheap US cash will soon feel the plunge.
Bond yields in the US have been driven higher and the ten-year treasury yield touched a cyclical high of 2.8935 per cent on August 21, before the public-ation of the Fed’s FOMC minutes. The minutes were viewed as relatively hawkish by most market analysts but didn’t have the expected impact on the greenback, while the ten-year yield has retreated to 2.77 per cent.
Investors will more likely be ready for any Fed tapering and this will probably push the greenback and treasury yields higher. Upcoming economic data from the US will now be heavily scrutinised to gauge the strength of the economic recovery as forex traders assess the likelihood of Fed tapering in September.
Upcoming FX key events
Today: German Unemployment Change, German CPI & US GDP Preliminary.
Tomorrow: EZ Inflation, Canadian GDP, US Personal Spending & US Michigan Consumer Sentiment.
Technical key points
EUR/USD is neutral. EUR/GBP is neutral. USD/JPY is bullish, target 105.60, key reversal point 92.50. GBP/USD is neutral. USD/CHF is neutral. AUD/USD is bearish, target 0.8760, key reversal point 0.9520. NZD/USD is bearish, target 0.7600, key reversal point 0.8200.
RTFX Ltd is licensed to conduct investment services business by the MFSA. This information does not constitute advice, should not be relied on as such to enter into a transaction, or for any investment decision and is provided for information purposes only.
Emman Xuereb is a trader at RTFX Ltd.