As of early Thursday, global financial markets were clearly in a “risk-off” mode. Investors rushed to safe-haven assets such as the US Dollar, Japanese Yen and Swiss Franc. Such drastic action is not taken lightly, yet this move follows increasing geopolitical pressure and growing trade deal uncertainty. America’s market participants are treading water in anticipation of next week’s flood of economic data releases. As they further, imbalance among the notable currencies and products screens a vigilant contrivance.
US Dollar (USD), Japanese Yen (JPY) and Swiss Franc (CHF) have all held up well so far. It’s not that they’re geniuses – they’re profiting from a booming demand for safe haven assets. The bond market has to some extent mirrored these upward movements, especially in government bonds, as investors flock to safe havens during this turbulent period. Strikingly, Gold’s has still managed to shine the most, taking its positive momentum into the second day in a row, reaching new weekly highs.
Safe-Haven Currencies Gain Traction
At times of increased global financial panic, some currencies have shown the ability to appreciate. Take for example the US Dollar, Japanese Yen, and Swiss Franc — clear winners in the ongoing risk-off environment. Investors home in on these currencies typically during times of heightened market volatility.
The Japanese Yen has been an outlier, given the surge in demand for Japanese government bonds. This is particularly true given that domestic investors hold over 99% of these bonds. Second, they are usually more hesitant to divest their investments in times of crisis. This stability is due to the Yen’s reputation as a safe haven.
Risks and Repercussions Geopolitical tensions are highly elevated, most acutely in the Middle East. In response, investors are pouring back into stable currencies to hedge their assets against inevitable losses.
Geopolitical Tensions and Economic Indicators
There are a number of reasons fueling this latest risk-off sentiment. As geopolitical tensions across the world further escalate and all economic indicators—including tripling unemployment insurance applications—indicate a much slower economy, recent headlines related to the Iran-Israel situation further contributed to market nervousness, leading to a recent retreat in crude oil prices. WTI crude has fallen back about 1% from recent peak of $67.82 as speculators digest this news.
Traders are anticipating the release of new data from the US Bureau of Labor Statistics (BLS). They are certainly waiting to see what comes from the first of two US Treasury 10-year note auctions today. These indicators will help paint a clearer picture of the health of the US economy and help shape future monetary policy decisions.
“US anticipates Iran could retaliate on certain US sites in Iraq.” – Jennifer Jacobs, CBS News senior White House reporter.
“US officials have been told Israel is fully ready to launch an operation into Iran.” – Jennifer Jacobs, CBS News senior White House reporter.
Currency Movements and Market Reactions
The USD/JPY currency pair comes under pressure. It is keeping losses just below the 144.00 level as safe haven demand for the Yen increases. At the same time, EUR/USD has been doing well, mostly holding near seven-week highs above 1.1500 after a 0.50% Wednesday advance.
Tensions between the US and China over restrictive trade policies have subsided. Questions still hang over President Donald Trump’s tariffs on major trading partners. These unanswered questions remain a source of concern for investors and further feed the overall risk-off tone.
In that light, the recent US CPI data—inflation data—surprised everyone by coming in softer than expected. This has bolstered expectations for a potential September interest rate cut from the US Federal Reserve. These predictions would be in line with the defining features of a risk-off environment, amplifying motivations for currency movements and investor actions.