Forex Today: Middle East tensions keep investors on edge
Here is what you need to know on Monday, September 7:
Financial markets cling to a cautious stance at the beginning of the week as investors assess the latest developments in the Middle East. Stock and bond markets in the United States (US) will be closed in observance of the Labor Day holiday on Monday. The European economic calendar will feature revisions to second-quarter Employment Change and Gross Domestic Product growth data, as well as the Sentix Investors Confidence for September.
US Dollar Price Last 7 Days
The table below shows the percentage change of US Dollar (USD) against listed major currencies last 7 days. US Dollar was the strongest against the New Zealand Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.32% | 0.03% | -2.77% | -0.56% | -0.86% | 0.80% | 0.24% | |
| EUR | 0.32% | 0.36% | -2.44% | -0.24% | -0.54% | 1.08% | 0.58% | |
| GBP | -0.03% | -0.36% | -2.88% | -0.59% | -0.90% | 0.72% | 0.13% | |
| JPY | 2.77% | 2.44% | 2.88% | 2.21% | 1.96% | 3.55% | 2.99% | |
| CAD | 0.56% | 0.24% | 0.59% | -2.21% | -0.31% | 1.33% | 0.73% | |
| AUD | 0.86% | 0.54% | 0.90% | -1.96% | 0.31% | 1.63% | 1.04% | |
| NZD | -0.80% | -1.08% | -0.72% | -3.55% | -1.33% | -1.63% | -0.58% | |
| CHF | -0.24% | -0.58% | -0.13% | -2.99% | -0.73% | -1.04% | 0.58% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The data from the US showed on Friday that Nonfarm Payrolls rose by 162K in August. This reading followed July's increase of 21K and beat the market expectation of 56K by a wide margin. Additionally, the Unemployment Rate remained unchanged at 4.1% in this period, even though the Labor Force Participation Rate increased to 61.6% from 61.4%. Following the upbeat labor market data, the US Dollar (USD) gathered strength against its rivals, while the CME FedWatch Tool's probability of a 25 basis points Federal Reserve (Fed) rate hike at the upcoming policy meeting climbed to 60% from about 50% before the release. In the European morning on Monday, the USD Index holds steady, slightly above 99.00.
US Dollar underperforms as equities tighten inverse correlation
Analysts at ING argue that, given “high energy prices and an above-consensus August NFP reading,” the Dollar “should really be doing better than it is.” They suggest the currency’s muted performance “probably owes to the still constructive investment environment, where global equity markets, including emerging markets, continue to perform well.” ING notes that, among the various relationships they track, “the inverse correlation between global equities and the Dollar seems to be the strongest right now – far higher than the Dollar's link to oil prices.”
Over the weekend, the US military attacked three Iran-linked oil tankers, reportedly disabling two and destryoing a third in the Gulf of Oman. In response, Iran targeted three US-affiliated vessels in addition to three oil tankers attempting to pass through the Strait of Hormuz. Meanwhile, Tehran said that they will declare a restricted zone near the Strait of Hormuz and unveil the new shipping route agreed on with Oman "in the coming days." After rising about 8% in the previous week, the barrel of West Texas Intermediate push higher to start the new week and it was last seen gaining nearly 1% on the day at $90.00.
Strait of Hormuz tensions stoke energy security fears
Deutsche Bank’s Jim Reid and team note that the Iran conflict over the weekend saw “a tit-for-tat escalation targeting commercial shipping in and around the Gulf,” with multiple tanker incidents reported. Citing Reuters and other major news agencies, they highlight that “several tanker incidents and maritime attacks heightened concerns about the security of energy supplies moving through the Strait of Hormuz,” as both sides traded accusations over responsibility for the disruptions.
Gold (XAU/USD) lost about 1% on Friday and snapped a two-day winning streak. As tensions in the Middle East remain high, XAU/USD stays on the back foot on Monday and was last seen losing about 0.7% on the day near $4,400.
Following Friday's choppy action, EUR/USD stays relatively quiet in the early European session and fluctuates in a narrow band above 1.1600.
AUDUSD gathers bullish momentum to start the week and trades at its highest level since mid-May above 0.7200.
USD/JPY edges lower and trades near 155.50 after losing about 2.5% in the previous week.
GBP/USD holds steady above 1.3500 in the European morning on Monday.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.