Market Drivers June 25, 2019
USD/JPY test 107.00
Kiwi data beats
Nikkei -0.43% Dax -0.53%
UST 10Y 2.006%
Oil $58/bbl
Gold $1429/oz.

Europe and Asia:
NZD Trade Balance 264M vs. 200M

North America:
No Data

USD/JPY broke below the 107.00 figure for the first time since the flash crash at the start of the year as Iran hardened its stance stating that no diplomatic solution would be possible.

In fact, the Iranian statement was particularly harsh noting that fresh round of sanctions from the US means that the diplomatic path is closed “forever”. The news pushed the 10Y yields below the key 2.00% level which in turn sent USD/JPY to a low of 106.77.

The simmering tension between Iran and the US continues to keep markets on edge, but few speculators are pricing a full-scale conflict as neither party appears to be eager to escalate to the next level. In that sense, the current array of rhetorical salvos an isolated military actions looks similar to the North Korean missile test actions two years ago that terrorized the markets for a while but eventually came to be ignored. For sure, the situation in the Strait of Hormuz is geopolitically far more important, but the risk of actual conflict appears to be minor for now.

To that end, the focus in USD/JPY could turn towards economic matters as markets pivot their gaze to the G-20 at the end of the week. Although few participants expect any meaningful action in Osaka, there is latent hope that some sort of rapprochement between the US and China can be reached. President Trump especially appears eager for a PR win as he senses that any disappointment will reverberate badly in global capital markets.

Indeed the tensions with Iran raise the stakes in Osaka as the one-two punch of military conflict in the Gulf and trade conflict with Beijing could quickly damage the mood of the markets irrespective of whether the Fed cuts rates by 25bp or 50bp. Like a boyfriend who lies one too many times and sees his big bouquet of flowers thrown into the garbage, the Fed’s easing action may not work its charm on stocks this time if the two current conflicts are not tamed.

For now, USD/JPY remains mired below the 107.00 level and remains the key barometer of concern in the market, but any sign of easing of tensions could quickly send it through 108.00 and above as the week proceeds.