A Big Sigh of Relief
New York traders breathed a huge sigh of relief after the Dollar deftly sidestepped a gaping chasm when North Korea didn’t test H-bombs or launch ICBM’s and the devastation from hurricane Irma was not of the Apocalyptic scale some had anticipated
On cue, the US equity markets rocketed higher with the S&P closing in record territory while the US 10y yields pumped four bp’s higher to close at 2.13 Now that the ” storm has passed” and North Korea played the good man over their 69th anniversary, the question now is whats next for the beleaguered dollar as some key themes are developing in the background beyond the current NK risk play and dovish Fed narrative.
A relief rally or not the Green back has dodged the bullet once again.
Predictably USDJPY was the biggest beneficiary, rising from 108. 25 at yesterday’s Singapore open to 109.49 taking out last Wednesday high due to the unwinding of risk-aversion trades. It’s safe to say that haven trades were a bit stretched as traders could not get enough yen to whet their appetite last week when aversion trades were the rage so the unwind is not too surprising given the lack of Geo escalation over the weekend.
Investors in the JPY space will likely look favourably on the fact the UN Security Council has voted unanimously to step up sanctions against North Korea even if it’s watered down version of the US proposal but it does have the decisive support from both Russia and China.
However, the fate of USDJPY extension will be Thursdays US CPI and given we may have seen our high water mark for US inflation; a tepid CPI print will pressure USDJPY lower
After opening in Singapore yesterday at 1.2025 and flirting with 1.2035 in London, the Euro prices headed straight down as traders started fretting about the lack of top side follow through as arguably stretched USD dollar short position made trader nervous. Also and the fact that USDCNH found a base after rallying hard on Friday when the Pboc reduced forward hedging margins cooled the greenback sell off. But traders started trimming Euro longs aggressively when a Reuters article surfaced that a report, written by six European Central Bank members, supported a very very gradual roll back of the QE program. The Dovish ECB narrative has always been an impediment to gains above the 1.200 level as the Doves are not happy with the rapid appreciation of the Euro more so given that the EU is still in recovery mode and a strong Euro hurts productivity
The Aussie is slipping lower on the back of the USD recovery overnight. As for the regional sentiment, the Greenback was also buttressed by a rebound in USDCNH after the pair rallied from a multi year low when PBoC reduced the onshore FX risk reserve requirement from 20% to 0%. While this does not signal or is intended to curb the RMB appreciation, it gave rise to consolidation and traders were more apt to book profits amid crowded positions. Similarly, extended long Aussie positioning also turned for the exits