Article / 05 September 2017 at 7:49 GMT

FX Update: What to do with a problem like North Korea? — #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
  • North Korea jitters continue to reverberate across financial markets
  • But it seems like it would take a 'hot war' for risk appetite to suffer a major setback
  • RBA held rates steady and its statement reflected no urgency for policy tinkering
  • European Parliament negotiator Verhofstadt, said Brexit talks could be delayed
  • Time for EURUSD to make directional commitment after Friday's bearish reversal
UN headquarters in New York
 The US ambassador to the UN called on the world body to impose tough sanctions -- 
"the strongest possible measures" -- on North Korea. Photo: Shutterstock


By John J Hardy

Reverberations of the North Korean jitters continue to roil markets, but the impact seems to fading with each back and forth, even as the US ambassador to the UN, Nikki Haley, said on Monday that North Korea is “begging for war” and the rogue nation appears to be wheeling another intercontinental ballistic missile into place for a launch. 

It will take a hot nuclear war, it seems, for risk appetite to suffer anything besides the most minor of setbacks. Let's all hope that we don’t test that particular scenario. 

The Reserve Bank of Australia issued a statement that doesn’t seem to raise the urgency for tinkering with the policy rate. Most of the changes to the statement were shifts from specific to more general comments on the economy, and there was no change to the discussion on FX, which is at more or less the same levels as at the RBA's August meeting. AUDUSD traders have been stuck in no-man’s-land between 0.7800 and 0.8000 and await a signal, while AUDNZD traders will gain encouragement that Australian rates remain at the high end of the range after this latest RBA meeting. Important event risks for Australia remain this week, with second-quarter GDP up tonight and retail sales on Thursday.

The European Parliament’s lead negotiator in Brexit talks, Guy Verhofstadt, said that the next round of Brexit talks could be delayed until the last week of September to allow an “intervention” from UK prime minister Theresa May – apparently a speech on September 21. This could prove an important date for sterling as the Brexit talks have bogged down with no progress and the UK seems to have zero leverage with EU counterparts.

Chart: EURUSD

With the Monday holiday in the US out of the way, it is time for EURUSD to make a directional commitment after what appeared to be a bearish reversal on Friday – again, our basic assumption for a correction (for example, a 38.2% retracement of the move since the first round of the French presidential elections) is that the pair can retreat back to the 1.1500-1.1600 area if European Central Bank president Mario Draghi is able to sufficiently impress the market that the ECB is in no hurry to talk tapering until December.
Source: Saxo Bank
 
The G-10 rundown

USD – three Federal Open Market Committee voting members are slated to speak today – all three of whom are known doves. The greenback looks relatively resilient after surviving the recent test of new lows below major pivot levels – watching for signs of a debt-ceiling increase easing through for more potential upside, as well as euro weakness as a possible driver. Note that another rather terrifying hurricane is on its way to the US and could make a direct hit on Miami, with the entire state of Florida, the third most populous state, frantically readying for the hit.

EUR – it is no secret that ECB president Draghi will try to talk down market expectations for a tapering of bond purchases.

JPY – the yen receiving a mild risk-off bid on the latest round of news on the Korean peninsula, but otherwise little to support the currency.

GBP – sterling traders will look toward the purported Brexit speech from prime minister May  as a next step on Brexit as the current negotiation round has gone nowhere. In the meantime, positive news for UK manufacturers is worth considering as a solid fundamental trend for the UK. Still a chance for more EURGBP downside?

CHF – Swiss National Bank sight deposits shrank last week, and Swiss second-quarter GDP came in weak this morning, but the franc looks firm against the euro, possibly in anticipation of ECB dovishness and on residual risk-off from North Korean worries.

AUD – the Reserve Bank of Australia's statement was largely a non-event, leaving the market to watch commodity price developments and the next incoming data for whether AUD can continue to punch higher.

CAD – hike or no hike tomorrow as well as the guidance for future hikes are the immediate questions. Our wide-angle view is that CAD is nearing the top of its potential against the USD, given that the market is starting to price a higher policy rate for Canada than for the US, and Canada is more structurally vulnerable to a private leverage bubble.

NZD – the AUDNZD bulls are back in business after the RBA failed to dent Australian rate expectations, and NZD could also be vulnerable as the September 23 election approaches and as a change of government raises concerns about the outlook.

SEK – the Riksbank meets on Thursday, and it faces a tricky task to look more dovish than the ECB after recent inflation data – downside risks prevail in EURSEK.

NOK – A holding pattern for NOK as oil and Norwegian rates are going nowhere. The country's September 11 election looks like a formality for the ruling coalition.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0715 – 0800 Eurozone Aug. services PMI 
  • 0830 – Uk Aug. services PMI 
  • 0900 – Eurozone July retail sales 
  • 0915 – Australia RBA’s Lowe to speak 
  • 1130 – US Fed’s Brainard (FOMC voter) to speak 
  • 1400 – US July factory orders 
  • 1630 – US Fed’s Kashkari (FOMC voter) to speak 
  • 2300 – US Fed’s Kaplan (FOMC voter) to speak 


— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank

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