Investors frightened away as Iranian tensions rise

Summary:

• Iran claims that a diplomatic path has been closed forever after the US imposed new sanctions
• Equities in Asia move down, JPY gains while NZD also moves higher, US 10Y yield slips below 2%
• Some BoJ members pointed to risks related to further monetary easing

Geopolitical tensions mount

In response to a set of new sanctions imposed by the United States on some prominent Iranian people on Monday Iran said that the diplomatic path was closed forever. These words could be seen as a further escalation of a geopolitical dispute between the two countries. Let us recall that on Monday the US decided to impose sanctions against Iranian supreme leader Khamenei as well as eight other senior military commanders. On top of that, one cannot forget about recent remarks coming from Steven Mnuchin who suggested that financial restrictions would be imposed on Iranian foreign minister Zarif later this week. The Iran’s foreign ministry wrote in a statement that “the Trump government is in the process of destroying all the established international mechanisms for the maintaining global peace and security.” 

Investors reacted quite nervously to the above-mentioned escalation. As a result, US bonds gained traction, gold prices jumped, safe haven currencies increased while Asian equity indices slipped. Shortly before the close of Asian market one may notice that the Hang Seng is registering the largest daily loss so far being down 2.1%. At the same time the Shanghai Composite is falling 1.5% while the Japnese NIKKEI is sliding 0.6%. A so-called flight to haven pushed the US 10Y yield back below a 2% threshold mirroring the weakening outlook for global economic growth. Looking at the FX market similar conclusions might be drawn as the yen is leading the gains being up 0.3% against the US dollar while the Swiss franc is trading only subtly higher against the greenback. The one exception is the NZ dollar which is up 0.4% this morning against the US dollar. We may point to two reasons why it is happening amid the broad risk-off environment. The first one is a release on foreign trade for May showing a surplus of 264 million NZD against the expected surplus of 250 million NZD. What is even more important, both exports and imports beat expectations with the latter getting a boost from higher crude oil prices during that time. The second reason is the current stance of the Reserve Bank of New Zealand which is expected to keep rates unchanged on Wednesday while other central banks including those in Australia or the US have recently pointed to monetary easing.

The NZDUSD is surging this morning despite a widespread sell-off of risky assets in response to an increase in geopolitical tensions between the US and Iran. The first more notable resistance could be found in the vicinity of 0.6680. Source: xStation5

BoJ expresses concerns over further monetary easing

Over Asian session hours we were offered the minutes from the BoJ’s meeting taking place in April. A majority of members appears to still believe that inflation could reach the BoJ’s elusive target, and some of them even share the view that long-term inflation expectations are likely to follow an increasing trend thereby gradually converging to 2%. Let us remind that the Bank of Japan kept rates on hold in April (it did so last week too) and adopted a pledge to keep rates at the current low levels at least until the spring of 2020. On the other hand, some members seem to be concerned about possible side-effects regarding further monetary easing suggesting that such a step could bring more negative than positive effects. The document revealed that the bar for further rate cuts seems to be set quite high even if the economic outlook deteriorates. There is no doubt that the BoJ is not in a good position to fight a possible economic downturn. Therefore, fiscal rather than monetary policy should become more proactive.

After breaking below the orange trend line the USDJPY could even drive toward 104.7 where the more notable support may be localized. Source: xStation5

In the other news:

• Boris Johnson promises the UK will leave the EU on October 31, adding that the UK parliament is ready to back a no-deal Brexit scenario

• Donald Trump said that he did not intend to do anything with Fed’s Chairman Jerome Powell

• Bitcoin trades at $11 290 this morning being up 4%