Special Report: US-Iran On The Verge Of War?
The Daily Edge

Special Report: US-Iran On The Verge Of War?

8 Jan 2020
Authored by Ivan Delgado

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. You can also subscribe to the mailing list to receive Ivan’s Daily wrap. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

The Daily Edge is authored by Ivan Delgado, 10y Forex Trader veteran & Market Insights Commentator at Global Prime. Feel free to follow Ivan on Twitter & Youtube weekly show. The purpose of this content is to provide an assessment of the conditions, taking an in-depth look of market dynamics – fundamentals and technicals – determine daily biases and assist one’s trading decisions.

Let’s get started…

Quick Take

One of the immediate effects whenever the dark clouds of war prospects hover around is the increase if volatility. Sadly, that’s precisely what we saw in the opening of the Asian session after news broke out that at least 30 missiles had landed at Iraq’s Ain Al-Asad airbase among other locations, targeting US forces. The retaliation by Iran to the death of its highest military profile leader has now taken long, and the open question now remains, to what extend will the US strike back? Will a war be declared? The buying of the Japanese Yen and the Swiss Franc currencies was fast and furious, as it was the sell-off that hit the Oceanic currencies (AUD, NZD). The rest of G8 FX (EUR, GBP, CAD, USD) were not greatly affected by the ebbs and flows as a result of the jump in risk aversion. Instruments were the panic mode was immediately noticeable included equities, where the S&P 500 futures wiped out all the gains since mid Dec, the price of Oil, which received a punchy spell of demand, alongside the further defiance of gravity by a flying gold. The fluid situation heralds the clear risk of unraveling into a full-on war, with the ramifications being heightened volatility in Gold, Oil, the Yen, Swiss Franc, Bond yields and equities. Should the US refrain from engaging in further retaliation, a major relief rally could be in store. Much will depend of whether the attacks have claimed US casualties. 

The indices show the performance of a particular currency vs G8 FX. An educational video on how to interpret these indices can be found in the Global Prime’s Research section.

News Summary Of The Iran-US Conflict 

* The Information is gathered after scanning top publications including the FT, WSJ, Reuters, Bloomberg, ForexLive, Institutional Bank Research reports.

  • Just ahead of the Tokyo open, news broke out that at least 30 missiles had landed at Iraq’s Ain Al-Asad airbase among other locations, which contain US forces, Reuters news agency reported. Several sources, including CCN, Bloomberg, Washington Post immediately confirmed that the airbase had been hit, followed by a statement via a US defence official.
  • As per the official reactions so far, the Pentagon said it is aware of media reports of the bombing but made no comment. Meanwhile, the White House says it is aware of reports of attacks on US facilities in Iraq, while reports detail that Trump has been briefed and is monitoring the situation.
  • There have been reports of a second shelling at an Iraqi airbase where US military personnel resides. An Iraqi security source told Reuters at least seven rockets fell inside Ain Al-Asad air base in Anbar province. Pentagon is working on ‘initial battle damage assessments’, confirming via Pentagon spokesman Jonathan Hoffman that another Iraqi airbase was targeted in Erbil.
  • White House press secretary Stephanie Grisham has said: “The president has been briefed and is monitoring the situation closely and consulting with his national security team.”
  • Reports have emerged that Iran’s Revolutionary Guard claimed responsibility for the attack, waing the US and regional allies against retaliating, adding that any US counterattack will be met with a more crushing response, according to state-owned Press TV. It also waed other countries hosting US forces will be targeted if they launch attacks on Iran.
  • This aggression by Iran, including the bold bravery to claim responsibility for the launching of these rocket attacks represents a major escalation, one few could think was possible given that it almost assures direct war against the world’s military superpower. This attack genuinely represents a major risk to a full blown-up war before the week is over.
  • If it ends up unraveling into a full-on war, the ramifications for the volatility about to hit Gold, Oil, Japanese Yen, Swiss Franc, Bond yields or equities cannot be sufficiently overstated.
  • Trump will be forced to act against this aggression, especially if the attack claimed US casualties in the region. US casualties will prompt an escalation from Trump no matter what, especially with elections this year. Trump’s response, citing his own statement, “may be disproportionate.”
  • if sources confirm no US casualties, expect a short-term reprieve in risk-off, even if the dark clouds of war prospects will keep hovering for days on end. There are so far conflicting reports, with CNN reporting no casualties, while other sources note there are casualties. If no casualties, it’ll mean Trump has leverage as a US response may be less likely or at least more limited.
  • Donald Trump is reportedly preparing to deliver a speech about the missile attacks in Iraq. Not confirmed yet. White House correspondent Kaitlan Collins tweeted: “Aides are making urgent preparations at this hour for Trump to address the nation. The specific timing TBD & could be delayed given we are still leaing info but two officials say a speech is being prepared and plans made for Oval address.”
  • Iran has stated that they’ll stop attacking if there is no response from the US, according to US media in Tehran. The report reads that if there is no retaliation from America for these latest attacks then Iran will stop attacking. But if America attacks then their response will be crushing and wide spread

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Recent Economic Indicators & Events Ahead

Source: Forexfactory

Outlook For Instruments Most Affected By The US-Iran Crisis

The reaction in the Forex market has been to take the Australian Dollar to the woodshed, while the Yen got bid to the boots, leading to a sharp fall in the AUD/JPY. This is one of the markets that may see the most pronounced one-way traffic as the reshuffling of portfolios into the safety of the Yen and away from beta currencies creates the perfect bearish storm. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target, we can see that just ahead of 73.00 is the next logical target for the pair, which from a liquidity standpoint, makes sense, as the area is found below a double bottom.

One of the characteristics witnessed across the board as news of the Iranian attack broke out is the increasing tick volume (sell-side commitment), which in relative terms, tracks very closely real volume in spot forex. I tend to label this type of patte a ‘real money or smart money acceleration’. More often than not, when it happens, rebounds tend to provide sell-side opportunities.

Another asset that has taken off, further extending its bullish momentum, and never looked back is Gold. By resorting to a weekly timeframe, we can observe that appears to be more technical room for the asset to keep printing gains, with the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target at $1,658.00. Before reaching such hefty elevation, profit taking is likely to be taken circa $1,625.00. Remember though, should the US declare war to Iran, these levels should act as a baseline for reference but the unorderly vol could easily see these levels broken quite easily. Note, the prospects of war is the single most reliable source of predictability for gold’s upward trajectory.

As we tu the focus to the USD/JPY, it’s completed a bearish successful rotation, which should open the doors to further downside in due time. The projections, based on the last 2 bracketed areas broken, indicate that 107.20 down to 107.00 is the next bearish target. Note, the pair remains greatly overextended even if the current risk-off environment suggests that shallow rebounds should be expected as the prospects of direct war between the US and Iran went up.

As per Oil, the prospects of war and the disruption of production in the region has led to an immediate buying of the instrument, currently trading above the $65.00 mark, with the round number $66.00 the next relevant horizontal support to account for if you are holding longs. Above that level, each $2 interval offers the next macro resistance as the chart below illustrates.

In the equity market, the S&P 500 futures have suffered the largest fall since late November, wiping out the gains made since mid December in one single candle. The downside room looks like is wide open until the next 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} proj target around the 3,158.00 is tested, a level that coincides with a critical level of prior resistance, expected to act as support on a backtest.

Important Footnotes

  • Cycles: Markets evolve in cycles followed by a period of distribution and/or accumulation. To understand the principles applied in the assessment of cycles, refer to the tutorial How To Read Market Structures In Forex
  • Horizontal Support/Resistance: Unlike levels of dynamic support or resistance or more subjective measurements such as fibonacci retracements, pivot points, trendlines, or other forms of reactive areas, the horizontal lines of support and resistance are universal concepts used by the majority of market participants. It, therefore, makes the areas the most widely followed and relevant to monitor. The Ultimate Guide To Identify Areas Of High Interest In Any Market
  • Trendlines: Besides the horizontal lines, trendlines are helpful as a visual representation of the trend. The trendlines are drawn respecting a series of rules that determine the validation of a new cycle being created. Therefore, these trendline drawn in the chart hinge to a certain interpretation of market structures.
  • Fundamentals: It’s important to highlight that the daily market outlook provided in this report is subject to the impact of the fundamental news. Any unexpected news may cause the price to behave erratically in the short term.
  • Projection Targets: The usefulness of the 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to 1. The side in control of the cycle takes profits 2. Counter-trend positions are added by contrarian players 3. These are price points where limit orders are set by market-makers. You can find out more by reading the tutorial on The Magical 100{fad136c3b301f886579c91f4401bb3fa617b1aef253d164853185bb8273fc814} Fibonacci Projection