The yen had a resurgence overnight after President Obama announced that he would authorise air strikes against the ISIS militants in Iraq. This is the latest geopolitical risk that is keeping governments and central bankers on their toes. ECB President Mario Draghi mentioned the risk posed by Russian sanctions in his press conference on Thursday, while Bank of Japan governor Kuroda also noted geopolitical tensions as being a key risk for the economic outlook.
As tensions have risen the markets have started to get jumpy. This has been bad news for stocks and good news for the typical safe havens: hence Gold has risen to its highest level for nearly a month, the yen is the best performer in the G10 FX space and U.S. 10-Year Treasury yields, a good gauge of risk sentiment, have plunged to their lowest levels in 14 months.
What we don’t know is if this is the start of a deeper sell off, or if the markets have over-reacted to these geopolitical events and the sell-off could be reversed.
A good gauge of risk sentiment can be EURJPY. The yen tends to sell off when risk aversion bites, and further selling this morning caused this cross to post new lows, ahead of critical support at 153.33, the 50% Fib retracement of the June 2013 – December 2013 bull trade. A close below this level would be a bearish development that could open the door to 132.89, the deeper 61.8% retracement level.
But while a further sell-off is a possibility, especially in these uncertain times, the mini recovery this morning suggests that the latest bout of risk aversion could be starting to fade. The high of the day is 136.46; a close above this level could set the stage for a deeper recovery next week, if risk sentiment does not take a turn for the worse. On the upside, key resistance levels to watch out for include: 138.10 – the 50-day sma, and then 139.28 – the July 3rd high.
Since EURJPY is bucking the trend of weaker risky assets on Friday, this cross could be a useful lead indicator. If the recovery continues then it may be an early sign that sentiment is starting to improve and stocks could stage a reversal.
Takeaway:
- • Geopolitical tensions continue to rise on Friday with news that the US may launch air strikes against Iraq.
- • The markets are jumpy and stocks have sold off sharply.
- • EURJPY was also weaker as the yen received a safe-haven boost.
- • We don’t know if this sell-off could be the start of a new trend, or if the markets will calm down.
- • EURJPY has started to show signs of recovery as we have progressed through the European morning. This cross could be a good lead indicator, and if the recovery continues then we could see overall risk aversion start to fade.
Figure 1: 
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