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Video / 05 September 2017 at 7:49 GMT

From the Floor: Why EURUSD 'needs to commit' — #SaxoStrats

#SaxoStrats
   • EURUSD at a fork in the road ahead of Thursday ECB outing
   • Risk of short squeeze developing in WTI crude oil: Hansen
   • 'North Korea still the biggest threat to global markets': Garnry
   • Charts show a bullish reversal in the Nasdaq 100 index
   • Saxo asset allocation moves to the defensive side in equities

SaxoStrats
By Michael McKenna

With the US Labor Day holiday now behind us, today marks the traditional start of "post-summer" markets with traders looking for rising volatility as liquidity returns.

Monday saw geopolitical risk rise to levels unseen since immediately before the US invasion of Iraq 14 years ago, and North Korea's announcement that it will test another intercontinental ballistic missile caused risky assets to retreat in the face of a potential conflict.

US ambassador to the United Nations Nikki Haley said yesterday that Pyongyang is "begging for war". But Saxo Bank's head of forex strategy John J Hardy reports that the traditional yen strength/risk-off move in the face of such provocations "appears to be fading," adding that "we will likely need to see the continued standoff progress further if it is to produce more volatility... and let's hope that we don't".

Last night's Reserve Bank of Australia meeting showed a central bank that is in no hurry to move on policy, and FX traders are now looking to Wednesday's Bank of Canada meeting as well as Thursday's releases from the Swedish Riksbank and the European Central Bank for direction.

According to Hardy, the big question surrounding the ECB is whether president Mario Draghi will attempt to talk down the widely discussed quantitative easing taper. In euro terms, Hardy says that EURUSD "needs to commit" to either a correction down to the 1.16-1.15 level or else a renewal of the recent rally.

"Bears will be in a bad situation if we return above, say, 1.1950," concludes Saxo's FX chief.

EURUSD

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Source: Saxo Bank 

While the North Korean situation may not be pushing on yen as strongly as it did Monday, Saxo head of equities strategy Peter Garnry says that "we are shifting our asset allocation to go a little more defensive," citing increases in biotech and government bond representation.

"Our portfolio now sees 4.6% weight in government bonds versus 2.4% last week," adds Garnry.

Garnry reports that the Saxo House View is now neutral on European shares and positive on the US after the rally seen in EURUSD. 

In Saxo Bank technical analyst Kim Cramer Larsson's view, the Nasdaq 100 is currently seeing a reversal of the recent bear trend that could take the index up to 6,100 from its current level of 5,987.

Ultimately, however, the question at the forefront of Garnry's mind is "what works when equities decline?" In the view of Saxo's equities head, investors should look to utilities, telecoms, healthcare, consumer staples, and gold miners in the event of a protracted retreat in stocks.

Reporting on spot gold prices, Saxo Bank head of commodity strategy Ole Hansen says the precious metal remains supported by the North Korean crisis, but cautions traders to "mind the gap" down to $1,332 and $1,329/oz.

Gold currently trades just shy of $1,336/oz.

Finally, Hansen points to a squeeze risk developing in WTI crude oil where an overhang of supply following Hurricane Harvey-driven refiner disruptions is distorting markets somewhat; the risk, says Hansen, comes from the 78,000 jump in gross shorts – the second-largest such rise ever.

For more on gold, oil, equities, Bitcoin, and technical analysis of recent moves in EURUSD, the Dax, and the S&P 500, listen to our strategists' morning call in its entirety.

WTI
Hurricane Harvey devastated refinery demand in the US. Photo: Shutterstock

Michael McKenna is senior editor at Saxo Bank 

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