Article / 09 August 2017 at 8:04 GMT

FX Update: Dose of risk-off spoils complacency — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Trump's 'fire and fury' warning to N.Korea sends wave of risk-off across markets
  • Risk-off shift could lead to deleveraging of recent positions
  • Sharp correction in EURGBP since yesterday
  • ZAR weakened sharply as president Zuma survived a no-confidence vote
  • RBNZ's Wheeler likely to err on dovish side and to push kiwi lower

Missile and North Korean flag
President Trump's 'fire and fury' warning to North Korea sparked 
a wave of risk-off sentiment. Image: Shutterstock

By John J Hardy

A modest dose of risk-off sentiment washed over global markets yesterday after US president Donald Trump issued a broadside against the North Korean regime, which answered with threats of an oddly specific pre-emptive nuclear strike against Guam, a US Pacific territory. We don’t dare to contemplate where this could lead, only that the confrontation with North Korea and the regimes behavior feel quantitatively different this time around than past threats. Bloomberg takes a stab at discussing what the military option might look like. 

This kind of totally exogenous event is difficult to weave into the market’s current narrative and could produce odd movements, most of which have nothing to do with “fundamentals”, save for the existential threat to a country like South Korea if a hot war breaks out, and more to do with deleveraging of recent positions. Examples of the latter include a rather sharp correction in EURGBP since yesterday. Sterling is not a safe haven, but speculators are heavily short the currency, so it’s merely a case of position squaring.

The South African rand weakened sharply from the day’s highs as president Jacob Zuma once again survived a no-confidence vote. That USDZAR hasn’t broken higher above 13.50-60 suggests market observers had priced the event correctly. Still, USDZAR is elevated locally and near/above the 200-day moving average – an indicator that has held previous rallies back three times since March. Uncertainty and risk-off elsewhere is ZAR-negative.

Back to normal business: the Reserve Bank of New Zealand's statement and governor Graeme Wheeler's subsequent press conference are the highlight later today. Given weak inflation expectations, weak recent dairy prices, and the recent strong NZD exchange rate, we see Wheeler likely to err on the dovish side and to push the kiwi lower. Market expectations for rate rises somewhere in 2018 look premature.


A weekly close near or below current levels begins to look like a rejection of the NZDUSD rally off the 0.6800 base.
The G-10 rundown

USD – strong JOLT job opening survey yesterday offered the greenback a bit of a boost. Further risk-off sentiment would look USD-supportive at the margin, if not necessarily against the JPY. Interesting to note that the risk-off failed to see much of a bid in US treasuries, which is normally associated with JPY rallies.

EUR – the euro fell sharply against JPY and CHF on position squaring, at least partly inspired by the North Korea tensions. A long wait for signals from ECB president Mario Draghi at Jackson Hole later this month.

JPY – the JPY is proving a safe haven on the North Korea inspired risk-off move yesterday – 110.00 looks pivotal for JPY crosses. But EURJPY could prove a high beta cross to further risk-off/risk-on as EURJPY was a popular trade in recent weeks and further risk-off could see significant consolidation on position squaring.

GBP – sterling is pulling higher against the euro, likely on position deleveraging, and GBPUSD is battling below the pivotal 1.3050-1.3000 area. Note the July RICS house price balance survey tonight – the reading dipped to 7% in June, the lowest in more than four years. A reading below 0 suggests house prices are broadly falling.

CHF – the franc spikes higher on position squaring as the EURCHF rally was one of the more recent, hot moves, particularly relative to prior trading ranges. Brave souls suspecting that the North Korea situation leads nowhere may be itching to participate here.

AUD – AUDUSD spiked back well below 0.7900 overnight, with the risk-on/risk-off tone likely to dominate the immediate outlook. Iron ore prices are providing support at the margin as they have jumped back from yesterday’s selloff.

CAD – interesting Canada housing-related data up today, though these are erratic data series. Given wobbly tone in risk and recent CAD speculative run, there is risk of further consolidation higher in USDCAD to 1.2900-1.3000 zone.

NZD – RBNZ up tonight, with press conference an hour later. Focusing on whether AUDNZD can punch through 1.0800-50 and NZDUSD remains offered on the other side of the event risk. NZ 2-year rates have dropped to their lowest for the year in the last couple of days.

SEK and NOK – these seem to be on summer vacation, though NOK traders should note tomorrow’s Norway July CPI release.

Upcoming Economic Calendar Highlights (all times GMT)
  • 1215 – Canada July Housing Starts 
  • 1230 – Canada June Building Permits 
  • 1230 – US Q2 Preliminary Unit Labor Costs and Nonfarm Productivity 
  • 2100 – New Zealand RBNZ Official Cash Rate announcement 
  • 2200 – New Zealand RBNZ’s Wheeler Press Conference 
  • 2301 – UK July RICS House Price Balance 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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