Forex Today: Investors seek refuge on reports of Israel attacking Iran


Here is what you need to know on Friday, April 19:

Safe-haven flows dominate the action in financial markets on the last trading day of the week as investors seek refuge on growing fears over a deepening conflict in the Middle East. The economic calendar will not feature any high-tier data releases and market participants will keep a close eye on geopolitical headlines.

In the early hours of Friday, reports of Israeli missiles striking Iran triggered a flight to safety. Although Israel is yet to officially confirm a retaliatory attack against Iran, several news outlets, such CBS and CNN, reported US officials saying that Israel has carried out the strike. On the other hand, Iranian state media said that the air defense system brought down three drones over the central city of Isfahan. Moreover, a senior Iranian official told Reuters that there was no plan for an immediate retaliation because there was no clarification on who was behind the incident.

Risk-aversion grips financial markets after Israeli missiles strike a site in Iran.

Reflecting the risk-averse market atmosphere, US stock index futures are down between 0.55% and 0.8% in the early European session. Meanwhile, the US Dollar Index holds relatively steady above 106.00 after closing in positive territory on Thursday.

US Dollar price this week

The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the strongest against the New Zealand Dollar.

  USD EUR GBP CAD AUD JPY NZD CHF
USD   0.06% 0.28% 0.08% 0.99% 0.75% 1.01% -0.49%
EUR -0.03%   0.23% 0.06% 1.00% 0.71% 0.97% -0.53%
GBP -0.27% -0.21%   -0.18% 0.72% 0.48% 0.73% -0.76%
CAD -0.09% -0.04% 0.17%   0.94% 0.63% 0.92% -0.59%
AUD -1.04% -0.99% -0.79% -0.95%   -0.29% -0.03% -1.54%
JPY -0.74% -0.68% -0.46% -0.66% 0.24%   0.28% -1.25%
NZD -1.02% -0.97% -0.75% -0.93% 0.02% -0.27%   -1.51%
CHF 0.49% 0.55% 0.77% 0.58% 1.47% 1.23% 1.49%  

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the Euro from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent EUR (base)/JPY (quote).

 

With the immediate reaction to the news, crude oil prices shot higher. After reaching a daily high of $85.58 during the Asian trading hours, the barrel of West Texas Intermediate (WTI) erased a large portion of its gains and was last seen rising 1.6% on the day at $83.15.

Gold spiked above $2,410 following the reports but returned to the $2,380 area into the European morning. 

EUR/USD turned south and came within a touching distance of 1.0600 early Friday. The pair managed to erase its losses and was last seen trading flat on the day, slightly below 1.0650.

GBP/USD slumped to its weakest level since November below 1.2400 in the Asian session. The pair reversed its direction and recovered toward 1.2430 heading into the European session. The UK's Office for National Statistics reported on Friday that Retail Sales grew 0.8% on a yearly basis in March following the 0.3% contraction recorded in February.

During the Asian trading hours, the data from Japan showed that the National Consumer Price Index (CPI) rose 2.7% on a yearly basis in March, down slightly from the 2.8% increase recorded in February. This reading came in line with the market expectation. In the meantime, Bank of Japan (BoJ) Governor Kazuo Ueda said that they may raise interest rates again if the Yen's declines considerably increase inflation, highlighting the impact currency moves may have on the timing of the next policy shift. After falling sharply toward 153.50 earlier in the day, USD/JPY retraced its decline and was last seen trading virtually unchanged on the day near 154.50.

Risk sentiment FAQs

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

 

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