Escalating Middle East tensions could spur forex volatility
The extraordinary events featuring the Islamist extremist movement ISIS seemingly determined to carve out a new caliphate covering large parts of Syria and Iraq could yet have big reverberations in the currency markets.
Potential volatility in the currencies is likely to be first telegraphed through the oil market with the Middle East being a key supplier to the world economy. Should oil prices soar, say if ISIS made further big advances, then there could be serious damage done to the world economy.
In the currency markets that's likely to mean a rush to safe havens. These would include USD, CHF, JPY and even gold. Petro currencies such as NOK would likely be longer-term beneficiaries.
Many emerging market currencies along with GBP and the EUR are likely to be among the losers. Indeed, INR has already lost some ground against USD as India is heavily reliant on Middle East oil.
Soaring oil prices likely see ZAR fall heavily versus USD
Navigating the Middle East's ultra-complex politics
Events in the Middle East are always complex and difficult to predict. Syria is mired in a bitter civil war whilst Iraq could break up. Meanwhile, the aftermath of the Arab spring, which swept aside dictatorial regimes across North Africa, may also create openings for extremists to take hold.
To illustrate the complexity of the situation the US may end up in an alliance with Iran to defend the Iraqi regime. It could even end up cooperating with the Syrian government it is bitterly opposed to as they now all have a common foe in the shape of ISIS.
Such alliances would go down badly in Saudi Arabia, which views Iran as a regional enemy. At the same time the West has shown remarkable weakness in recent years over events in the Ukraine, Syria and Georgia. This gives more potential for currency volatility as investors typically seek stability and decisive action from the great powers.
If the situation did escalate in the Middle East the US could release oil from its strategic reserve and Saudi Arabia could pump more of it to calm the markets – both actions have occurred before when the world economy has been under the threat of high oil prices.
For the moment the Middle East is not dominating thinking in the currency markets, but that could very quickly change if ISIS makes further gains.
By Justin Pugsley, Markets Analyst MahiFX
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