Insurgency in northern Iraq has push oil prices and gold higher. The Iraq crisis also managed to stir foreign exchange market, particularly the Yen and USD. How will it influence this week forex trading?

Insurgency led by Islamic State In Iraq And The Levant (ISIS/ISIL) in northern Iraq has been ongoing for the last week. The situation escalated as Kurdistan Government in Iraq mobilized its army to seize control. Crisis in the second biggest oil producer country in OPEC also managed to stir commodities and forex.

IraqMap Of ISIS Insurgency In Iraq (BBC, 16 June 2014)

 

Commodities Hit Highs On Iraq Crisis

US crude oil prices rose past 107 USD a barrel, close to nine-month high, in the market this morning. The repercussions of turmoils in Iraq is feared to disrupt oil production and exports in the country. As well, Gold prices have touched the highest level in almost three weeks in relation with investors and hedge fund managers rising interest toward safe haven assets amidst geopolitical uncertainties.

Worries spread after ISIS tried to takeover oil refinery city Baiji and the Kurdish takeover of Kirkuk, an important oil hub in the north. Along with the escalated tensions, it is thought that OPEC might unable to fulfill daily production target of 1 million barrel a day in coincidence with the seasonal rising demand of oil in the second half of 2014.

Nevertheless, the majority of oil is produced in the southern Iraq, which is relatively far from the current battlefields. If Iraqi government army managed to repel the rebels before conflict upset the area, then Iraq oil export is salvaged and the market would seek another economic indicator to focus on. Meanwhile, the battle is coming to Baghdad, and investors are preparing for the worst by moving to safer assets.

IraqLocation Of Iraqi Oil Reserves By 2013
 

Risk Sentiment

Geopolitical risks in Iraq encourages Yen appreciation against USD, Euro, and other major pairs. It echoes the impact of Ukraine crisis in March. We could conclude that similar price movements most likely will be frequently repeated this year, because Ukraine crisis is not yet at end, and Iraq insurgents are still underway.

Yen is seen as one of the safest asset in the forex market, along with Gold and CHF. Consequently, every time disturbance haunts some vital part of the world economy, investors seek the Yen. On the other hand, Yen appreciation is not good for Japan economy. The paradox established a situation where the Yen movements will be controlled by risks and assets that offer higher return, such as US Government bonds and the USD.

Contrarily, the USD tends to weaken during conflicts in Middle East. The US is one of the world's biggest oil consumer, thus rising oil prices will negatively influences its currency exchange rate. If the current Iraq crisis is to go on for a long time, then it is possible that rising oil prices might disturb US economy recovery. Noenetheless, in short-term, the impact is limited.

 

Look Out For FOMC

At the start of the week, Iraq crisis and some other minor events might steal the spotlight, but Market focus is on Wednesday's FOMC and Janet Yellen speech. The market await an optimistic tune from FOMC, because US economic data last week have started to slip again. FOMC optimism will go a long way in assuring the market of US assets and easing the influence of geopolitical tensions in the forex market.