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Syrian tensions drive currency markets

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Syrian tensions drive currency markets

The dollar gained traction against its European counterparts on Wednesday, as currency investors continued to move into safe haven currencies. The escalation of tensions in the Middle-East has pushed traders into the greenback as a defense against adverse capital market movements.  Most market pundits believe that an attack on the Syrian regime is imminent, but countries such as Russia and Iran have warned that there will be consequences for any military force against Syria.

The Euro versus the US 2-year yield differential has broken out in favor of the Euro, but despite this move on Wednesday the greenback has gained traction.  Yields in the US in the 10-year space have declined nearly 16 basis points over the past 3-trading sessions, moving below 2.71, for the first time in the past two weeks.  Fear over tapering has moved to the sidelines, as US economic data in the past two weeks has failed to impress. The Yen has become attractive in the face of the Syrian tensions.  The 10-year yield differential between the US and the Japanese JBP has declined nearly 20 basis points this week, moving from 220 to 200 over the course of the last two trading sessions.

The breakout in the EU-US 2-year yield differential should eventually drive the currency pair above resistance at a horizontal trend line near 1.3452.  A close above this level would likely generate a test of the 2013 highs near 1.37.  Support on the EURUSD currency pair is seen near the 10-year moving average at 1.3360.

Momentum on the currency pair is flat, with the MACD printing near zero as the spread and the 9-day moving average of the spread are nearly equal.  The relative strength index (RSI) is hovering near the 54 level which is in the middle of the neutral range.

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