Why Syria is Brutal For Abenomics and USD/JPY

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Market Drivers for August 28th, 2013
USD/JPY stabilizes at 97.00 as markets await further Syria news
Euro fails at 3400 again as Consumer sentiment declines
Nikkei -1.51% Europe .02%
Oil $110/bbl
Gold $1423/oz.

Europe and Asia:
AUD Construction Work -0.3%
EUR Consumer Confidence 6.9 vs 7.1

North America:
USD Pending Homes 10:00

Currencies remained in a state of quiet apprehension markets watched warily the ongoing diplomatic maneuvering on Syria amidst another trading day barren of any significant economic data.

USD/JPY tested the 97.00 level once again in early Asia trade as Nikkei sold off hard but after Japanese equities failed to follow through on their selling the pair stabilized and rebounded to 97.40 by morning London dealing. BOJ deputy governor Iwata once again reiterated the central banks’ policy of raising the inflation rate to 2% within 2 years and noted that gains in stocks and declines in yen are necessary for BOJ policy to spread through economy.

However, the recent flare up of geopolitical tensions is doing BOJ no favors as yen once again becomes the repository of risk aversion flows, The recent decline in USD/JPY which initially began as result of wavering by the Fed on the issue of taper is now exacerbated by the growing concern over the prospect of military action in Syria.

Furthermore, the risk of geopolitical conflict may force the Fed to delay any QE tapering on the assumption that escalation of the conflict in the Middle East could have a chilling effect on global trade and commerce. The Fed may therefore choose to remain highly accommodative in order to offset any contraction in economic activity.

With UK Prime Minister David Cameron stating that Britain has drafted a UN resolution to condemn the chemical attack and authorizing necessary measures to protect civilians, it appears that Allies are clearly gearing up for some sort of military action in Syria. All of this unexpected conflict is taking its toll on BOJ attempts to reflate the economy.

If the conflict in the Middle East turns into yet another quagmire the impact on Abenomics could be brutal. With yen continuing to strengthen Japanese businesses would feel the pinch from both rising exchange rates and lower export demand threatening the country’s recovery and scuttling the best laid plans of BOJ to reflate the Japanese economy.

In trading today the economic calendar remains barren with only US Pending Homes sales on the docket and traders attention will likely be turned to Washington DC rather than Wall Street as markets continue to asses the situation in Syria. If risk aversion flows accelerate once again USD/JPY could retest 97.00 support as the day proceeds.

Boris Schlossberg
Managing Director

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