Morning Commentary: Escalate to De-escalate

Foreign Exchange - Morning Commentary
Escalate to De-escalate 
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Prior to last night, Iran’s response to the US’ actions in the Middle East had been fairly symbolic.  That all changed when Iran fired over a dozen missiles at US-Iraqi military bases last night.  At the end of the day, it isn’t a surprise that Iran responded to the killing of top Iranian General Qassem Soleimani.  The main question was how Iran would respond.

Based off comments from the Iraqi PM’s office, there were no casualties which, upon review, appears to be no accident and provides a path for de-escalation.  According to Iraqi Prime Minister Adel Abdul Mahdi’s office, Iran gave prior notice of the strike.  This implies that the Islamic Republic retaliation was a carefully coordinated effort to both satisfy the domestic outrage as well as provide a path to de-escalation. 

Notably, Iranian Foreign Minister Javad Zarif tweeted that Iran had “concluded proportionate measures” with President Trump responding with a relatively muted “All is well!” tweet.  These statements could indicate that last night’s action could be the extent of Iran’s military response and there might not be an immediate response from the US. 

This evolution in the world’s understanding of last night’s events played out in the price action of safe haven assets.  Initially after news of the strike broke, the yen, Swiss franc and gold all spiked higher.  Within a relatively short period of time, all these assets gave back nearly all of their gains and are currently sitting around where they were before the attack.  A similar story can be seen with European and US equities and oil as both asset classes are well off their session lows, indicating that market consensus still believes major escalation is unlikely.  Given this, President Trump is scheduled to make a statement on Iran at 8 A.M. Pacific Time, so stay tuned. 
  • The US ADP jobs report came in at 202k, which beat expectations for a 160k print.  Additionally, last month’s number was revised up significantly from 67k to 124k.  As a reminder, the government’s jobs report is due this Friday. 
  • German factory orders came in much weaker than expected, printing -1.3% versus expectations for a 0.2% gain.  While this data series is a volatile one, it does add to concerns that Europe’s largest economy is still struggling to recover. 
  • Japanese wage data come in softer than expected, falling 0.2% against expectations for a 0.1% decline. 
  • In the UK, BOE Governor Carney made dovish comments, noting that the bank can still cut rates further and that his successor will have all monetary tools at his disposal.  However, Carney did admit central banks have much less ammunition now.  Additionally, UK PM Johnson and new EC President von der Leyen will meet today, exposing the GBP to headline risk. 
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