Published: January 13th, 2020
– The events of the past weeks have proved detrimental to the dollar; prospects of a stabling world economy because of the China-U.S. trade deal meant global stability, which in turn implied that the gains would spread to other currencies as well. The situation offered a breath of life to other currencies, mostly the yen, yuan, and the Euro. However, with the prospects of escalation of war between the U.S. and Iran at zero, the dollar is looking good again.
A U.S. drone strike on January 3, 2020, near the Baghdad International Airport, claimed the lives of among others, Qasem Soleimani, an Iranian Major General, and the head of the Islamic Revolutionary Guard Corps. The incident brought Iran and the U.S. to the brink of war, especially after Iran retaliated by firing about two dozen missiles into some U.S. army bases and installation in Iraq.
Markets reeled in the wake of the attacks and the ensuing tensions between the two countries. Global stocks suffered the most, plummeting several folds just hours after the news of the Iranian general’s killing became public. However, gold rose to a six-year high, as did Treasury bond prices, and oil. Seemingly, investors were ditching volatile assets. Besides, a general fear that the global oil supply will also take a hit was evident.
The currency markets behaved no differently. The pound and the yen experienced some reprieve and climbed amid the melee. The dollar that enjoys favour from the prospects of war, rallied as well to outshine the two currencies. Though, the Japanese yen kept the greenback on toes all this while.
With the two nations looking ready to engage in an all-out war, the yen, which is a safe-haven currency usually not influenced by geopolitical turmoil, rose. However, when President Trump hinted that the U.S. will not engage in any further retaliatory attacks, the markets reacted by bolstering the dollar.
The Japanese currency dropped to a two-week low against the greenback when investors moved to absorb more risks and focus on the U.S. non-farm payrolls announcement and the Sino-U.S. trade deal.
The market stability turnaround happened when Trump opted to enforce sanctions instead of violence. Besides, Iran gave no immediate indications after the announcement that it will retaliate further against the U.S. aggressions. The tweets from both President Trump and a senior Iranian government official playing down the potential of escalation brought the much-needed calm to the markets.
On Tuesday, Trump qualified the damage assessment after the missile attacks as “So far, so good!” On his part, Mohammad Javad Zarif who is the Iranian Foreign Minister termed his country’s attacks as proportionate, adding that his country was not seeking war.
John Doyle, a vice president at Tempus Inc. in charge of dealing and trading said that the rise in the price of the dollar is the market’s correction mechanism to the status quo before the Iran situation flared up. He added that January 8, 2020, press conference by President Trump left Iran with not much impetus to retaliate.
The yen is a safe-haven currency because of the cash account surplus in Japan and the currency’s deep liquidity. Despite these great qualities, it lost all the gains it had raked against the dollar. At the end of trading on Wednesday, January 8, the dollar was trading at 109.51 yen, 0.4% higher than when the session began. Earlier, the currency had reached 109.57 yen, the highest peak since December 27, 2019.
Other losers were gold and Swiss franc, another safe-haven currency. The franc lost gains that took it almost two weeks to build. The shift in the focus of the money markets comes with an equal movement in the implied volatility indicators. The dollar/yen figures fell some 3.45%, just 0.09% above the November figures, the lowest ever recorded in the past decade.
With the dissipating prospects of war, the attention of the markets shifted to the global economy. With hopes rife that the U.S. and China will pen the specifics of their trade deal this week, the market experts hope the event will offer the necessary support for gold, oil, and other risk assets.
Besides, investors are banking on the Sino-U.S. trade deal to create certainty and clear fog hovering over one of the world economy’s biggest and long-standing doubts; a fluid global trading environment.
Sure as the prospects of the deal may sound, there is a section of the market that thinks it is too optimistic to put all hopes on a smooth trading path between China and the U.S.
For now, the shifts in the currency markets will also have to depend on the U.S. non-farm payrolls report. With a forecast of about 164,000 new jobs created in December, there are good chances this figure will create an upside surprise. The movements on the scale, however, may not be as great considering that it almost half the 266,000 new jobs recorded the previous month.
While the yen was taking a beating, China’s yuan made moderate gains in the offshore market trades. The yuan rose to 6.9175 on the dollar, a five-month high. The yuan’s fortunes may have benefited from the steady inflation readout.
The Swiss franc which had earlier dropped to a two-week low remained unchanged during the Thursday and Friday trading sessions. The currency traded at 0.9702 to the greenback. The Euro, on the other hand, plummeted 0.3% to stand at $1.1124, very close to the session’s lows.
The U.S. and Iran threw the world into the brink of war. Though not much has come of the altercations, the Japanese yen suffered by shedding off almost two weeks of gains. The ensuing peace now changes the focus of the global economy on the possible fluid trading systems between the U.S. and China. If the deal on the table bears fruits, then the entire global economy stands to gain. Before then, however, it is prudent to wait and see.