NEWS / Foreign Exchange

Market will swing to the US dollar then back to Euro

??? Iran capture of UK military personnel could snowball
??? Market will swing to the US dollar then back to Euro
??? Australian dollar remains firm and ready to capitalise

The Iran capture if 15 UK military personnel is what markets are going to be spooked about today. Perhaps later in the day this issue may calm down, but markets being markets, especially currency markets, they are going to want to run with this story logarithmically toward all out conflict.

If that improbable worst case scenario were to develop, it could be significant. There has been talk that Israel actually practised deep bunker penetrating munitions and tactics during the conflict in Lebanon, as the defences there are similar to Iran. The results and data were passed on to the US, or so the story goes. If there is any truth in that, then any developing crisis with Iran over the 15 UK sailors/marines could be used as a catalyst by the US and/or Israel to take action against the nuclear facilities there. The US has a history of utilising extraneous events in such a manner. I really do think the market will have to factor in some probability of an open conflict by any of the UK, US, or even Israel, with Iran in the next 1-3 weeks.

The most probable scenario is a politically managed crisis over a week or two, and peaceful resolution. The markets will however have to factor in some degree of risk of the worst case.

The worst case market implications are Oil 10 dollars higher, and at first a rush back toward the US dollar as a risk aversion wave. This could also trigger some Yen buying, unwinding of carry trade scare again, but Japan is hurt more than anyone else by higher oil prices. Nevertheless the currency risk over the next few days would be some US dollar buying, Yen buying, and some high yielder selling.

This may only last a few hours, or at most I would think 3 days. The best way to know that the ???Iran scare US dollar rally??? was complete, would be to watch for the Euro to recover technical resistance at 1.3310 and for further confirmation 1.3350. Once above there it would be clear the US dollar was once again resuming the downtrend.

Fundamentally the Euro is a better buy than the US dollar in such a crisis I would suggest, but the market is likely to at first buy US dollars, then after that wave rush for the Euro. Sterling will be offered until people are clear as to whether the UK will take military action to recover its personnel, perhaps simultaneously with any air strike against Iran??™s nuclear facilities. For now it is all diplomacy and uncertainty making it difficult for sterling to bounce. Eventually however I do believe Sterling will again strike sharply higher. The background long term fundamental decline of the US dollar is unaltered.

As per the Euro chart below there is risk to 1.3150, but tend to favour 1.3215 or even 1.3250 containing for resumption of sideways consolidation at first, then to significant new highs.

The Australian dollar has held up better than most currencies against the initial US dollar bounce. This simply confirms the strong fundamental and robust nature of the bullish Australian dollar story. As long as support at .7995/.8000 holds, the AUD is still in an aggressively bullish mode. A lot of people will be watching the .8045 level on the day where some serious fresh buying interest has emerged. Perhaps this is one of those starting to chase the market large exporters, or a major global fund. A move above resistance at .8080 will see .8150 quite quickly, but a little cautious at first today while the Iran story has a run.