Major Overnight Headlines
• Britain says intl. community “must respond” “proportionately” to Syria chemical attacks, Thomson Reuters
• TRY drops to new record low versus USD on Syria spillover, preexisting external imbalance
• Germany’s IFO Business Climate Index slightly better at 107.5 (107.0 exp.) in August
Tensions such as those mounting between Syria and a large swathe of the international community are never really convenient for the macro environment, but in terms of tradable paradigms within the FX space, a full-scale escalation of the Syrian conflict involving the most influential world powers will wreak havoc on the 2-3 month macro-based FX outlook within the G10 space.
As the tone this morning in London indicates, whilst the general trend in developing market currencies will be fairly straight forward as tensions develop into outright international conflict, we need to remember that, broadly speaking, the G10 space has been priced for relative growth and monetary policy divergence for at least the better part of the year – not geopolitical tensions. This is another way of saying that the Q4 2012-Q3 2013 stretch has been one of the most data- and monetary policy-dependent since the Global Financial Crisis swung into acute mode in 2008/2009. Moreover, yield-driven “risk-off” has largely supplanted “classic risk-off” as means of reading into and reacting to events, but an intense market focus on Syria and the international response could see a return to the latter, in which the USD strengthens even as the fall in US yields outpaces that of its core peers on rising UST demand. For “classic risk-off” to return in full force, a major chunk of the views placed on relative macro economic performance will need to be undone first. Therefore, in the run-up to “risk-on/risk-off”, moves within the G10 space will not be straightforward at all as spreads adjust and repatriation flows intensify. We would not recommend buying or selling EUR/USD in the very nearterm purely on the basis of Syrian headlines.
If anything, we would say that the US’s “no global coordination on monetary policy necessary” attitude displayed at Jackson Hole over the weekend narrows the odds of some type of intervention in Syria taking place. The US’s role in “policing the world” will be seen in some quarters as justification for doing whatever is needed to the value of the USD in order to achieve domestic economic objectives.
Read the full report: FX Daily
BMO