Right now, forex markets are like a volcano – calm on top but a seething mass of fire and brimstone underneath. Indeed, those who trade currencies need to be aware of a whole range of simmering tensions around the globe that have the potential to erupt in a very short space of time.
The dispute between Asia’s two economic super-heavyweights over a barren outcrop of rocks called Senkaku/Diaoyu Islands is escalating, with China sending seven warships to Okinawa Island in the last few hours. Over the weekend, a major Japanese newspaper reported that Japan and America would undertake a joint exercise to ’retake’ Irisunajami Island, in Okinawa prefecture and not far away from the Senkaku/Diaoyu islands. In Tokyo, the press is full of stories demanding that Japan builds many more navy ships. America is fanning the flames of the disagreement by recognising Japan’s ownership of the islands through a private sale last month. For its part, America continues to be frustrated by China’s position over the atrocities in Syria and its position with respect to Iran.
All of this is taking place at a time of significant political transition in both China and potentially America too. In the former, the 18th Congress of the Chinese Communist party commences on November 8th, with very little transparency over who will occupy the key leadership positions. The American presidential election is held two days earlier, in what has become a very close race between the incumbent and the challenger. Should Mitt Romney emerge victorious, we can expect a much more hawkish position on China than under President Obama’s reign.
At the same time as America is antagonising China in Asia, it is also contributing to escalating tensions in the Middle East. The economic sanctions imposed on Iran are crippling the economy, with the EU announcing fresh restrictions on Iran’s banking and shipping sectors. Yesterday America announced that it would be conducting joint air and missile-defence exercises with Israel before the end of the month, as both countries attempt to ratchet up the pressure on Iran to discontinue its purported nuclear weapons program. For his part, Mitt Romney has vowed to raise Israeli cooperation and assistance if elected. At risk of course is the potential for Iran to close the narrow Strait of Hormuz, through which 35% of the world’s sea-borne oil cargo passes through. Much of Japan’s petroleum passes through this Strait.
How these various global geo-political hotspots develop over coming weeks will have a critical bearing on currency and asset markets. At a minimum, there is a lot of potential for increased volatility relative to the stasis experienced over recent months.