Happy Labor Day to those traders in North America.
Although the US stock and bond markets are closed (and in Canada too), the forex market is up and alive. The overall bias is to the downside with the USD is moving lower led by an oversized decline vs the JPY of -1.15% leading the declines. Some catalysts for the move:
- BOJ rate-hike expectations: Markets increasingly expect the Bank of Japan to raise rates by 25 basis points next week, with another potential increase later this year.
- Narrowing yield spreads: Japanese yields are rising relative to U.S. yields. A narrower U.S.–Japan interest-rate advantage makes holding dollars against the yen less attractive.
- Intervention concerns: Japan’s recent record yen-buying intervention remains fresh in traders’ minds. That is discouraging aggressive USDJPY buying and may be forcing some shorts in the yen to cover.
- Carry-trade unwinding: Traders who borrowed cheap yen to buy higher-yielding assets are buying those yen back as the interest-rate outlook changes.
- Technical momentum: USDJPY broke below support near 155.15, triggering stops and accelerating the decline toward 154.00.
- Thin holiday liquidity: With U.S. markets closed for Labor Day, lighter liquidity may be magnifying the move.
The greenback’s move to the downside is more limited vs the EUR at -0.10% and the GBP at -0.12%
In the video above, I take a look at those three currency pairs from a technical perspective to kickstart the holiday session in North America.
Middle East tensions rise over the weekend
Geopolitical tensions in the Middle East increased over the weekend, helping push oil prices higher to start the new trading week.
The most significant development involved a direct escalation between the United States and Iran. Iran fired ballistic missiles toward two U.S. Navy ships, although no American personnel were injured.
The U.S. responded by striking three Iranian crude-oil tankers and warned that additional Iranian vessels could be targeted.
Shipping through the Strait of Hormuz slows
Shipping activity through the Strait of Hormuz also declined sharply. Iran is expected to announce a new restricted zone and shipping corridor in the Gulf, increasing the risk of further disruptions through one of the world’s most important energy chokepoints.
Elsewhere in the region:
- Fighting between Israel and Hezbollah intensified. Hezbollah launched drones toward Israel, while Israel carried out additional strikes in southern Lebanon.
- Israeli strikes continued in Gaza over the weekend.
- Israeli Prime Minister Benjamin Netanyahu reportedly ordered the removal of unauthorized settler outposts in the West Bank following U.S. pressure over increased settler violence.
Oil prices move higher
The oil market is responding to the increased geopolitical risk:
- WTI crude oil is up $0.88, or approximately 1.0%, at $92.36.
- Brent crude oil is up $1.21, or 1.25%, at $97.48.
Why the Strait of Hormuz matters
A significant share of the world’s oil and liquefied natural gas passes through the Strait of Hormuz. Even if the physical supply of oil has not yet declined significantly, the threat of disruption can push prices higher.
Shipping companies may also face higher insurance, security and transportation costs. Those additional expenses can eventually be reflected in the price of oil.
Understanding the geopolitical risk premium
The additional amount buyers are willing to pay because of the threat of a future supply disruption is commonly called a geopolitical risk premium.
It is important for traders to understand that oil markets trade expectations, not simply current supply. Prices can rise before an actual shortage develops. Conversely, oil could quickly give back some of its gains if tensions ease and shipping activity returns to normal.
What traders should watch next
The concern is no longer limited to threats surrounding the Strait of Hormuz. The weekend included direct attacks involving U.S. warships and Iranian oil tankers, along with another sharp decline in commercial shipping through the strait.
As long as shipping remains restricted and the risk of retaliation continues, oil prices are likely to maintain a geopolitical risk premium. The next question is whether the conflict remains contained or expands into additional attacks against tankers, energy infrastructure or other shipping routes.
This article was written by Greg Michalowski at investinglive.com.