The FX Trader: The energy overlay from the Iran conflict in focus.

The latest

Anyway, the market reaction overnight was telling, as the US dollar remains the current safe haven through this even as US treasuries came under strong pressure yesterday. Besides the traditional appeal of USD liquidity in times of turmoil, the market positioning was very short US dollars before this broke out – so significant fuel from position squaring still out there. As well, strategically speaking, the US is the world’s premiere oil and natural gas super power and invulnerable to supply disruptions from the region.

The Japanese yen? We may be seeing a shift in the JPY’s behaviour here as the currency managed to keep pace with the US dollar overnight as risk sentiment soured. Japan said that it won’t be immediately affected by any halt to LNG supplies from Qatar, with about 11% of its imports of LNG coming from there, about equal to Europe’s dependency. But the yen weakness of late has partially been a product of global risk-on and foreign participants in Japan’s equity markets likely hedging all JPY exposure as a “freebie”. This link to risk sentiment (both Japan’s savers participating in strong global markets, especially in EM, and foreigners hedging their JPY exposure) may trump any interest rate differential angle on the currency. I have long argued that EURJPY is absurdly elevated – but it needs to smash down through 180.00 for this view to get any traction.

The energy overlay: Europe the most vulnerable. It’s uncertain how long this conflict will last. US president Trump and US Secretary of State Rubio have been out saying that the most significant attacks on Iran are yet to come. With oil and especially natural gas prices on the rise, the “energy overlay” is critical and Europe, the UK, Sweden and even Switzerland look the most vulnerable on that front of the major currencies. Japan is vulnerable as well  from an energy angle, but note that other factors are in play as described above. Norway, the US and especially Canada look strong on this front, Australia is a mixed bag (strong LNG exporter, but traditionally a pro-cyclical currency).

Some “energy overlay” pairings that might see a trend intensification or even trend shift on a tardy reaction to what is going on in this conflict: To take a variety of pairs, could we see CHFNOK, EURJPY, GBPJPY, GBPCAD, AUDCAD all under downside pressure?

Chart focus: EURUSD
EURUSD is breaking down again, having taken out all key local supports and now not that far from eyeing the low of the year below at 1.1573, given the volatility expansion. We have a very dynamic situation here and market positioning was very poorly prepared for the new concerns this war with the Iranian regime is driving. A significant spike in energy prices for Europe on this conflict - along the lines of the 100-130 dollar per barrel levels noted by the major US banks on top of natural gas price spikes  - could see the price action in EURUSD quickly slicing down through 1.1500 and the lows just below that level from November and to the top of the old range in the 1.1200-1.1250 area.