Although hostilities in the Middle East have temporarily subsided, the threat of outbreaks in the future are an ever present risk.
Geopolitical risks have not completely dissipated and a division appears to be opening up in the world between the West and what Gideon Rachman, Chief Foreign Affairs Commentator for the Financial Times, calls an “axis of adversaries”. These include Russia, Iran, North Korea and China.
Rachman points out that the military base outside Isfahan targeted by the Israelis in Friday’s attack, is in fact, a nuclear enrichment site which utilizes Chinese-supplied reactor technology.
A further outbreak of hostilities or general ratcheting up of geopolitical risk factors is likely to see safe-havens like the JPY rise, with bearish implications for USD/JPY.
War is not the only potential source of geopolitical risk that could pressure USD/JPY. Reports of a fresh strain of the Omicron variant of the Covid-19 virus have also destabilized markets at the start of the new week.
“While the WHO is urging caution, it noted that symptoms linked to the new strain so far have been mild. Because it will take some time to determine the likely impact on the global economy, we believe risk aversion will continue this week,” say analysts at private investment bank Brown Brothers Harriman in a note on Monday.
A handful of countries have already introduced minor social distancing measures, but if the strain begins to spread and pose a more serious health risk, this could present a fresh risk factor for investors, leading to a steady stream of funds into safe-havens, favoring the Japanese Yen above all.
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