Iraq Shock To Lift Safe-Haven Currencies Ahead Of Crude Oil Exporters

Iraq Shock To Lift Safe-Haven Currencies Ahead Of Crude Oil Exporters






07/06/20140 
Any setback to the government in Southern Iraq could lead to greater demand for the more liquid currencies like; USD, JPY, CHF.

A sudden and sustained rise in global Crude Oil prices caused by violence in Iraq would trigger a rush into safe-haven currencies like the Yen and the Swiss franc, despite Japan and Switzerland being importers of Crude Oil.

Ever since the violence escalated, and drove Crude Oil prices higher, both currencies have held their ground, challenging a view that higher Crude Oil prices usually translate into big wins for Crude Oil-exporting countries and their currencies.

Higher prices improve the trade balance for Crude Oil exporters like Canada and Norway and push their currencies higher, on the other hand they tend to hurt Crude Oil-importing nations.

Now, investors are wary that a supply shock could hurt global recovery prospects and hit the less-liquid and riskier commodity currencies first.
Brent Crude Oil has risen 8% since May to hit a 9-month high at 15.71 in mid-June on worries that sectarian violence in Iraq could hurt Crude Oil output. With Iraq contributing to about 11% of the daily production from OPEC, any supply disruption would be painful.

As of now, there is little sign of large scale supply disruptions and Crude Oil prices have eased, keeping action in the currency market limited. But currency investors are watching whether the fight extends into Iraq’s South.

Around 90% of Iraq’s Crude Oil shipments are from the South an area largely unaffected by unrest. Any setback to the government there could lead to greater demand for the more liquid currencies like the JYP, CHF and USD.

All 3 currencies are sought-after during financial market turmoil and uncertainty about the global economy. And all 3  have more or less held their ground this year, despite stocks soaring and riskier currencies performing well.

The Canadian Dollar (CAD) and Norway’s Crown (NOK) are down 4% Vs JPY so far in Y 2014 and both have underperformed the rise in Crude Oil prices which have risen 3% on the month.

Higher Crude Oil prices are not always bad for economies or financial markets.

If GDO (gross domestic output) is on a strong footing already, strong demand for energy, higher stock markets and growth-linked currencies can co-exist nicely, analysts said.

But when Crude Oil prices result from supply shortages, both the reduction in quantity and the higher price will tend to hit economic activity. In fact, every US recession except 1 since the mid-1970′s has been associated with a spike in Crude Oil prices.

The United States now is much better placed to manage a Crude Oil shock given its dependency on imports is declining.

In the derivatives market, implied volatilities show there is little sign of an Crude Oil price shock factored in.

Currency volatility has been crushed, languishing at multi-year lows, highlighting most major currency pairs are likely to trade in a range and unlikely to see sharp and volatile swings.

But, that may change and a Crude Oil shock could see implied volatilities rise.

This is not surprising as a period of stress and uncertainty tend to be associated with higher vols. The highest pick-up in vols is seen on historically higher beta currencies such as AUD, the NZD, and NOK.

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