Imminent Syria Strike and Rout in Emerging Markets Underpins Dollar, Yen, Swiss Franc

The US dollar is well bid against most of the major and emerging market currencies, driven by a general risk averse attitude, sparked in part by a growing sense that a strike on Syria is imminent, while the crisis in Egypt appears far from over. 

The semblance of stability seen at the end of last week in the emerging markets has been dashed as the rout in local currencies and assets continues.  The MSCI Emerging Market equity index is off about 1.2% near midday in London.   The two emerging Asian currencies that have been the lightening rod in the region, continued to suffer today, with Indonesia rupiah off 4.3%, while the Indian rupee is off nearly 2%.  There was continued talk of intervention in other centers (from Thailand to Malaysia) to dampen the volatility. 

Among the majors, the Australian and New Zealand dollars are the poorest performers, while the Japanese yen and Swiss franc are the only major currencies to gain against the dollar (0.8% and 0.15% respectively).  Sterling is also under pressure ahead of BOE Governor Carney's speech tomorrow in which he is expected to protest against the rise in UK rates and, by implication if not directly, sterling.  We note that the 10-year gilt yield has shed 9 bp, which in part is a little catch-up to the US Treasury move yesterday when UK markets were closed for the bank holiday.  

Ironically, one of the key market forces in recent weeks has been the backing up of US interest rates in anticipation of tapering as early as next month.  Yet the US 10-year yield has eased almost 20 bp since last Thursday's high water mark, and there has been little or no whetting of the risk appetites.  

Indeed, outside of Syrian developments, the news stream today has been light, with improvement in the German IFO the main economic news.  The assessment of the business climate rose to 107.5, the highest since April 2012, from 106.2 in July.  Both the expectations component and the current conditions measure rose more than the consensus expected.  Neither the DAX nor the euro derived much support from the news.  

European equities are under pressure.  The Dow Jones Soxx 600 is off by about 1.25% near midday in London, led by a 2% decline in financials  Core bond markets are firmer, while the periphery is under modest pressure, though the Spanish and Italian auctions did not cause additional disturbances. 

The US calendar features the CaseShiller house price index, the Richmond Fed survey and the Conference Board's measure of consumer confidence--none of which will impact tapering speculation, or really have the heft to change market directions. 

The euro held initial support see near $1.3320. This area roughly corresponds to the 20-day moving average and the trend line drawn off the mid-July and mid-August lows.    The low from last week was set by the brief and shallow dip below $1.33 last Thursday.  The upside now seems capped in the $1.3360-80 range.   

Sterling is trading heavier and is near 10-day lows.   A break of the $1.5480 could spur another cent decline to test the trend line drawn its mid-July and early-August trend line which comes in near $1.5370.  

For its part the Australian dollar has thus far held last week's lows, but tone remains fragile and it continues to struggle to hold on to even modest upticks.  The $0.8980 area offers initial intra-day resistance.  

Last week, the dollar's upticks against the yen were held in check by the downtrend line drawn off the late-May and July highs.  The risk averse tone, which does not mean foreign investors are flocking to Japan (not a safe haven in this sense), but that it interrupts Japanese investors willingness to export their savings, has seen the dollar slip to test the minor uptrend line established over the past two and a half weeks.  A break now of the JPY97.60 area could signal a test on last week's low near JPY96.90.  That said, the trend line drawn off the mid-June and earlier August lows is seen near JPY96.50-60 in the coming days and may be key to the depth of the dollar's pullback.