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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.

Japanese Yen

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

Euro

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

Australian Dollar

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

3 positions were entered last week with total profit of 10 points and the positions are listed below.

 7 Sep : EUR/JPY - Short at 130.25, exited at 130.15 (+ 10 points)
11 Sep : AUD/USD - Long at 0.8050, exited at 0.8050 ( 0 point)
11 Sep : EUR/JPY - Short at 130.20,

|                 AUD          EUR/JPY           EUR/GBP         CAD          GBP         GBPJPY
Jan             - 15             -275                - 35              -120
Feb           + 140            -17                  - 40              +11
Mar            - 20            +115                +132            - 19
Apr             + 30                                  - 40             +120                              + 45
May                             - 55                  +100             - 6               -65             -60         
Jun            + 81           +150                - 10             +185           -120           +205
Jul                                                       - 40                                                   - 60
Aug           +155          +200                 + 100           + 195           -45            - 50
Sep                              +10                                                                          +10   
Oct           
Nov         
Dec                                                                                                                                               
Y-T-D        + 371           +128               +167            +658             -230            +90

3 positions were entered among all 4 currency pairs with total loss of 35 points and the positions are listed below:

 7 Sep : EUR/USD - Short at 1.1980, exited at 1.2015 (- 35 points)
 8 Sep : USD/CHF - Long at 0.9450,
11 Sep: EUR/USD - Long at 1.1985,

|                 JPY             EUR             CHF            GBP

Jan          + 167             - 85              - 10            + 50
Feb          + 200            +150             +93            - 59
Mar              -23              -70               -23            - 35
Apr             + 65            + 93             + 50            - 40
May            - 65             - 35             + 100          -175
Jun            -100               -10               - 10          +175
Jul             + 85             - 35                - 8
Aug           + 35            +210             + 35            +65        
Sep           + 44            + 65                                
Oct         
Nov        
Dec                                                                                               
Y-T-D       + 407            +278               +227           - 9     

The trading week started on a positive note with traders in a good mood thanks to the absence of any new missile launches or nuclear tests in North Korea. However, it comes as no surprise as North Korea celebrated their 69th year of founding. As a result we saw a fall in demand for defensive assets like gold, the Japanese yen and Swiss franc. The greenback also benefited from Chinese banks easing their restrictions on US dollar purchases.

The central event for the US currency during this week will be the data release on the consumer price index on Thursday. Considering the recent depreciation of dollar, the cost of imports increased which will support inflation growth and that in turn may result in more hawkish rhetoric by Fed officials concerning the possibility of another rate hike before the end of the year.

The USD/JPY grew today due to stronger demand for risky assets like the US dollar and this offset positive statistics from Japan on machine tools orders that according to preliminary data increased in August by 36.6% compared to the same period of the previous year.

The news from Canada on the growth in the number of housing starts to 223,000 in August that is 9,000 more than expected was not able to compensate the pressure from US dollar appreciation and the fall of crude oil prices that traditionally have a significant impact on the price of USD/CAD.

EUR/USD

The EUR/USD, after some consolidation above the important 1.2000 mark, resumed negative dynamics and may soon reach the inclined support line. If it breaks through, we may see a change to the local rising trend to negative. In this case the next targets will be at 1.1825 and 1.1750. Upside potential is limited by the nearest high around 1.2100.

USD/JPY

The USD/JPY could not fix below 108.05 and is showing confident rising dynamics. Recently quotes have overcome the upper limit of the local descending channel and reached the 108.85 line, gaining a foothold above this line may become a trigger for massive purchases with the nearest targets at 109.60 and 110.30. The closest support range in case of the fall resuming will be at 108.00-108.05.

USD/CAD

The USD/CAD did not reach the psychologically important 1.2000 mark and is now correcting upwards within the descending channel. In case of price fixing above 1.2200 we may see further growth up to 1.2365 and 1.2550. Recent crossing of the zero point by the MACD signal line is in favour of this positive scenario. The strong support line is still located at 1.2000.

While investors were looking for riskier purchases after North Korea confounded rumors of an intercontinental ballistic missile test on Saturday, the euro retreated following the dovish remarks made by ECB member, Benoit Coeure, in Frankfurt. Meanwhile, the pound drifted higher during the European trading ahead of a busy data week and before the BOE policy meeting on Thursday.

The dollar continued gaining against its rivals in Europe as geopolitical risks eased on Monday. However, investors were focused on the outcome of the UN National Security Council meeting today, which will vote whether to impose stricter sanctions on North Korea. The isolated regime, which seems to defy global calls for termination of its nuclear programs, warned the US early on Monday of a counter-military attack if the US continues threatening the country with further sanctions.

Meanwhile, in the US, authorities were counting the damage caused by the ongoing Hurricane Irma, a week before the Fed policymakers meet to decide on interest rates. Although expectations are for the central bank to keep rates unchanged, as recent inflation data came in weaker than expected, the financial impact of the deadly natural disasters has wiped out any chance of another rate hike this year. Besides that, Trump said on Saturday that he would ask Congress to speed up the efforts to reform the US tax code given the costly damage from Hurricanes Irma and Harvey. On Friday, the President also recommended congressional policymakers to proceed with tax reforms before the end of September.

The dollar index was up by 0.28% on the day at 91.64. Dollar/yen and dollar/swissie reversed Friday's losses rising to 108.76 and 0.9526 respectively.

The safe-haven gold tumbled by 0.86% to $1,335 per ounce.

In contrast, the euro was pressured against the greenback during the European session as ECB member, Benoit Coeure, said on Monday in Frankfurt that the "medium-term period", in which inflation is said to approach the ECB target of 2%, might last longer if exogenous shocks to the strengthening exchange rate persist. Though Coeure added that the impact of the exchange rate on the block's economic growth might be softer than the one after the recent financial crisis, as the region's expansion is mainly based on higher domestic demand. The common currency dived into losses after the comments, falling to $1.1982.

Elsewhere, Britain's House of Commons will put the EU repeal bill, which aims to attach European laws into Britain's legal framework, on the table later today. Despite expectations being for the government to win the vote, the paper might find obstacles to turn into law when it passes to the second stage in front of the committees, where ministers might propose amendments.

Moreover, a stream of economic data out of the UK, including inflation and unemployment rate figures, will be eyed during the week before the Bank of England's policy meeting on Thursday.

The pound managed to climb near the one-month high of $1.3223 it touched on Friday, but it slipped to $1.3193 afterwards.

Looking at energy markets, Saudi Arabia's discussions with Venezuela and the non-OPEC member Kazakhstan to extend global supply cuts beyond March 2018 failed to lift oil prices further. The markets were mostly worried that Hurricane Irma hitting densely populated areas in Florida, could dampen oil demand in the US, the world's largest oil-consuming nation in the world.

WTI crude dropped by 0.80% to trade at $47.10 per barrel during afternoon European trading hours, while Brent fell by 1.30% to $53.08.

The loonie lost ground against its US counterpart amid declining oil prices and a strengthening dollar despite Canadian housing starts for the month of August coming in better than expected. Dollar/loonie jumped to an intra-day high of 1.2158 before sliding to 1.2143.

USD/CHF - 0.9521

Most recent candlesticks pattern : N/A

Trend                                    : Down

Tenkan-Sen level                  : 0.9511

Kijun-Sen level                    : 0.9488

Ichimoku cloud top                 : 0.9508

Ichimoku cloud bottom              : 0.9470

Original strategy :

Bought at 0.9450, Target: 0.9550, Stop: 0.9480

Position : - Long at 0.9450

Target :  - 0.9550

Stop : - 0.9480

New strategy  :

Hold long entered at 0.9450, Target: 0.9550, Stop: 0.9480

Position : - Long at 0.9450

Target :  - 0.9550

Stop : - 0.9480

As the greenback found support at 0.9439 and has rebounded, retaining our view that low is possibly formed at 0.9421 on Friday and consolidation with mild upside bias remains for retracement of recent decline, hence gain to 0.9550-55 would be seen, however, break above there is needed to add credence to this view, bring a stronger rebound towards resistance at 0.9595 which is likely to hold from here.

In view of this, we are holding on to our long position entered at 0.9450. Below said support at 0.9421 would risk weakness to 0.9390-00, having said that, further sharp fall below 0.9370-75 should not be repeated and reckon 0.9350 would hold from here, bring rebound later. 

GBP/USD - 1.3185

Most recent candlesticks pattern   : N/A

Trend                                 : Near term up

Tenkan-Sen level                 : 1.3198

Kijun-Sen level                    : 1.3195

Ichimoku cloud top              : 1.3158

Ichimoku cloud bottom        : 1.3124

Original strategy :

Buy at 1.3125, Target: 1.3225, Stop: 1.3090

Position : -

Target :  -

Stop : -

New strategy  :

Buy at 1.3125, Target: 1.3225, Stop: 1.3090

Position : -

Target :  -

Stop : -

Last week’s rally to 1.3224 adds credence to our bullish view that recent upmove from 1.2774 is still in progress and upside bias remains for further gain to 1.3225-30, then towards 1.3250, however, loss of near term upward momentum should prevent sharp move beyond latter level and price should falter below recent high at 1.3269, bring retreat later.

In view of this, would not chase this rise at current level and would be prudent to buy cable on subsequent pullback as 1.3120-25 should limit downside. Only below 1.3082 (previous resistance turned support) would abort ad suggest top is possibly formed, risk test of 1.3062 but reckon support at 1.3033 would hold.

EUR/USD - 1.1984

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.2001

Kijun-Sen level                  : 1.2008

Ichimoku cloud top             : 1.2035

Ichimoku cloud bottom      : 1.2001

Original strategy  :

Bought at 1.1985, Target: 1.2090, Stop: 1.1950

Position : - Long at 1.1985

Target :  - 1.2090

Stop : - 1.1950

New strategy  :

Hold long entered at 1.1985, Target: 1.2090, Stop: 1.1950

Position : - Long at 1.1985

Target :  - 1.2090

Stop : - 1.1950

Euro’s retreat after rising to 1.2093 late last week suggests consolidation below this level would be seen and marginal weakness from here cannot be ruled out, however, reckon downside would be limited and bring another rise later, above 1.2030 would suggest an intra-day low is formed, bring test of 1.2070-75, break there would signal the pullback from 1.2093 has ended, then retest of this resistance would follow but break there is needed to extend recent upmove towards 1.2150-55 (61.8% projection of 1.1119-1.1910 measuring from 1.1662). 

In view of this, we are holding on to our long position entered at 1.1985. Below 1.1950 (previous resistance turned support) would signal a temporary top is formed instead bring weakness to 1.1925-30 first. 

USD/JPY - 108.85

Most recent candlesticks pattern   : N/A

Trend                      : Down

Tenkan-Sen level              : 108.61

Kijun-Sen level                  : 108.26

Ichimoku cloud top             : 108.36

Ichimoku cloud bottom      : 107.92

Original strategy  :

Sell at 109.35, Target: 108.35, Stop: 109.70

Position :  -

Target :  -

Stop : -

New strategy  :

Sell at 109.35, Target: 108.35, Stop: 109.70

Position :  -

Target :  -

Stop : -

As the greenback opened higher today and has edged higher, suggesting near term upside risk remains for the rebound from last week’s low of 107.32 to extend gain to 109.00 (50% Fibonacci retracement of 110.67-107.32), however, still reckon upside would be limited to 109.39-40 (61.8% Fibonacci retracement and previous resistance) and bring retreat later, below the Kijun-Sen (now at 108.26) would suggest the rebound from 107.32 has possibly ended but break of 107.60-65 is needed to confirm and bring retest of 107.32.

In view of this, we are still looking to sell dollar on further recovery as 109.35-40 should limit upside, bring retreat later. Above 109.55 would defer and signal low has been formed, bring a stronger rebound towards resistance at 108.93 which is likely to hold from here due to near term overbought condition.

• European equity indices (+1%) and US stock-index futures rallied as investors sought risk assets after a feared missile launch from North Korea never materialized and Irma was downgraded. Treasuries, gold and the yen dropped.
• ECB Coeuré said that the exchange rate doesn't weigh on growth the way it once did, offering some comfort to those worried about whether a strong currency would undermine the eurozone's growth outlook.
• Euro bulls, who have a pretty good year so far, are positioning for further gains, with long bets sitting at their highest level in six years. Speculators were holding the biggest net long position on the euro against the dollar since May 2011 ahead of last week's ECB meeting, according to data from the US Commodity Futures Trading Commission.
• Britain faces a chaotic exit from the EU if lawmakers vote against legislation designed to sever political, financial and legal ties with the bloc, Britain's Brexit minister David Davis said before a key parliamentary vote.
• China is reversing a range of measures it had put in place to support its currency, a response to a recent surge in the value of the yuan that has hurt Chinese exporters and added to the country's economic headwinds. Starting today, the PBoC scraps a two-year-old rule that made it more expensive for traders to bet the yuan will fall in value.

Rates

US yields retest lost support

Global core bonds lost ground today. The majority of the losses occurred in the opening, though the decline accelerates at the start of US dealings following a sideways European session. Investors were anxious ahead of the weekend because of uncertainty surrounding North Korea (ICBM test on founding day?) and hurricane Irma. The worst case scenario was twice avoided, triggering a turn in risk sentiment. Second tier eco calendars on both sides of the Atlantic played no role. ECB Coeure said that ECB policy will remain accommodative for longer than in previous cases of demand shocks, likely limiting the negative impact of the euro's appreciation. His comments suggest that the ECB isn't too worried about the rise of the euro (go ahead for policy normalisation), but markets didn't react. Upcoming US supply weighted on US Treasuries as well. The US Treasury starts its mid-month refinancing operation tonight with a $24B 3-yr Note auction. Currently, the WI trades around 1.43%. The auction is followed by a $20B 10-yr Note auction tomorrow and a $12B 30-yr Bond auction on Wednesday.

At the time of writing, US yields increase by 4 bps (2-yr) to 6.6 bps (10-yr). The US 30-yr yield trades back above last week's broken support (2.68%) while the US 5-yr yield (1.7%) and US 10-yr (2.1%) are currently testing similar levels. A rebreak would imply that we've entered a sort of consolidation phase near the current lows. The German yield curve bear steepens with yields 1.2 bps (2-yr) to 2.7 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes range between -1 bp and +1 bp.

Currencies

Dollar rebounds. USD/JPY takes the lead

Investors left their defensive bias from the end last week as the damage of hurricane Irma might be less than feared. Core/USD yields and the dollar reversed a small part of last week's slide. However, the (technical) picture hasn't changed in any profound way. Recent lows of the dollar remain nearby. EUR/USD tries to return below the 1.20 barrier. USD/JPY is changing hands in the 108.85 area.

Risk sentiment improved materially in Asia this morning. The damage of Hurricane Irma is very substantial, but markets assume that the impact on the US economy is manageable. The tensions between the US and North Korea are not out of the way, but the impact on markets ebbed away. US bond yields opened higher, easing some pressure on the dollar after last week's sell-off. USD/JPY returned north of 108. The gains of the dollar against the euro were modest with EUR/USD trading in the low 1.20 area.

European markets joined the global post-weekend equity rebound. However, the impact on core bonds and on the dollar remained limited. ECB's Coeure elaborated on the value of the euro. He sees the recent rise as no immediate source of concern as it is supported by a recovery in domestic demand. At the same time, he warned that a rise of the euro due to an exogenous shocks could lead to an unwarranted tightening of momentary conditions. The reaction of the euro to Coeure's comments was negligible. EUR/USD held a tight intraday range close to, mostly just north of 1.20. The yield differential between the dollar and the euro widened at the open but stabilized soon. USD/JPY also didn't make further progress despite the overall positive risk sentiment.

US yields and the dollar tried to extend their rise at the start of US trading. EUR/USD initially struggled to break below 1.20, but trades currently in the 1.1975 area. USD/JPY made some further headway and trades at around 108.85. The dollar moves a bit further away from last week's lows, but it's too early to cry victory on a USD comeback. The extremes in USD/JPY and in particular in EUR/USD remain within reach if the newsflow would again turn USD-negative.

GBP well bid as BoE meeting looms

Since end August, sterling succeeded a good rebound against the euro and the dollar. This trend continued. Admittedly, additional sterling gains were modest today. The debate on the UK Brexit law continues, but provided little impetus for sterling. Later this week, the focus for sterling trading might gradually turn to the UK eco data (including the CPI tomorrow and labour market data on Wednesday) and the BoE policy decision on Thursday. Prepositioning on a slightly less dovish BoE perhaps kept sterling well bid. EUR/GBP trades in the 0.9080 area. Cable hovers near the 1.32 big figure.