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Risk-off Sentiment Pushes Dollar Down as North Korea Said to Launch Another Ballistic Missile Test
While markets were focused to see whether geopolitical risks would ease later on Monday after North Korea announced its successful test of a powerful weapon on Sunday, risk-off sentiment rose again instead, following rumors that North Korea was preparing for another intercontinental ballistic missile test. The dollar dipped into further losses, unable to find support as US and Canadian markets were closed for the Labor Day holiday.
According to South Korea's central news agency, the North Korean regime was speculated to be planning another intercontinental ballistic missile test into the Pacific Ocean. If this is true, the rising tensions between North Korea and the US might lead to military conflict. This came after the North Korean regime fired successfully its sixth and most powerful nuclear weapon on Sunday which was described to be a hydrogen bomb. Donald Trump answered back with a warning to cut any trade ties with nations doing business with North Korea, including China. China's foreign prime minister Geng Shuang responded to the sanction threats, saying that Trump's comments were "neither objective nor fair".
The dollar weakened further against its major peers in the wake of the news, sinking to 92.45.
Demand for safe havens remained strong, with dollar/yen and dollar/swissie trending near the day's lows. Dollar/yen was last trading at 109.58 while dollar/swissie was last seen at 0.9552.
The euro slowed down its progress made earlier in the Asian session despite the Sentix index released in early European session showed that investors' assessments of Eurozone's economic conditions improved. The index jumped by 0.5 points to 28.2 in September, exceeding the forecast of 27.4. The main driver of this positive adjustment was the optimism among investors about the future economic developments in the region, with the sub-index which captures expectations for the next semester rising by 1.3 points to 17.3. In contrast, current conditions were less favored as the corresponding index ticked down by 0.2 points to 39.8. Despite recent data proving that economic activity in the block is speeding up, markets expect the ECB to hold interest rates steady at the completion of its two-day policy meeting on Thursday and express its concerns over a strengthening euro as the latest comments from ECB policymakers have highlighted. Moreover, the ECB is also expected to start discussions on winding down its massive asset purchases during the meeting but the announcement on the decision will be probably made in October.
Sterling reversed some of its earlier losses against the greenback, to last trade at $1.2954. However, political woes continued weighing on the currency. After the third round of formal Brexit talks, last week didn't lead to a breakthrough in major subjects including the UK's financial obligations to the EU block after the exit. The UK Parliament is set to debate an EU repeal bill on Thursday. During the weekend, the UK prime minister warned lawmakers that if her EU repeal bill was not supported in the parliament then the country would be faced with a "cliff edge". British Finance minister Philip Hammond also argued on Monday that legislation should not be delayed as this would harm countries ties with the EU.
Furthermore, data out of the UK showed that construction firms experienced the slowest growth in a year in August. This was particularly due to an investment downturn in the commercial sector. The Markit/CIPS construction PMI fell by 0.8 points to 51.1, below the 52.0 forecast.
The aussie failed to gain ground versus the dollar, edging down to $0.7948 and being down by 0.24% during the day, following the disappointing figures on business inventories published on Monday. This comes a day before the RBA launches its policy meeting on Tuesday, where it is expected to keep rates unchanged at a record low for a considerable period of time, as policymakers are among others concerned about the currency's strength.
The loonie pared its gains, with dollar/loonie rising to 1.2417.
In commodities, oil prices were up, while gold was hovering below its 11-month high reached in the Asian session. WTI crude futures for October delivery touched a one-week high of $47.61 per barrel, whilst Brent rebounded to $52.73 after reaching an intra-day low of $51.96. Gold paused its upside movement, which led the precious metal to an 11-month high of $1,339.56 per ounce earlier today, last trading close to $1,335.00, up 0.7% on the day.
Copper Very Bullish at 3-Year High But Overbought
Copper futures (December 2017 contract) hit a three-year high of 3.1665 today as the commodity extended its 4-month long bull run. The rally has reinforced the bullish medium-term outlook that has been in place since November 2016, which had weakened while prices consolidated during the early part of the year.
The short-term bias remains strongly bullish according to the momentum indicators, but with both the RSI and the stochastics in overbought territory, the risk of a near-term correction is high. Prices briefly spiked above the upper linear regression channel today, before falling back towards the upper channel line. Further gains would take the focus to the 3.20 and 3.40 levels as the next key resistance areas.
In the event of a downside reversal, support will likely come from the 3.0960 area, which was a heavily congested region in late August/early September. Bigger declines would see support coming from the 3.0500 and 2.9950 areas, while a drop below the lower channel line (currently at 2.90) would open the way towards the 50-day moving average at 2.85.
A breach below the 50-day moving average would shift the short-term bias to negative.
Yen Gains Ground on North Korea Jitters
USD/JPY has posted considerable losses in the Monday session. In North American trade, the pair is trading at 109.61, down 0.58% on the day. On the release front, US banks are closed for the Labor Day holiday, so traders can expect a quiet North American session. In Japan, the sole event on the schedule is the 10-year bond auction.
The yen continues to show volatility due to the ongoing North Korean crisis, as the safe-haven asset has been in demand following hostile moves by North Korea. This was again the situation on Monday, as the yen improved following North Korea's announcement that it had exploded a hydrogen bomb which could be fitted to an intercontinental ballistic missile. Although the claim has yet to be verified by Western analysts, it is clear that this nuclear device test has ratcheted tensions between North Korea and the US, Japan and South Korea. Predictably, US President Trump strongly condemned the North Korean action and has not ruled out a military response. The increased tensions have again shored up the yen, as risk appetite has waned. If the crisis in the Korean peninsula continues, traders can expect the Japanese currency to continue to gain ground.
US employment numbers were unexpectedly soft on Friday, but the dollar shrugged off the disappointing numbers and held its own against the yen. Nonfarm employment change slowed to 156 thousand, well below the estimate of 180 thousand. This marked a 3-month low. However, with the US labor market still close to capacity (the unemployment rate is just 4.4%), the markets can be forgiving about a softer nonfarm payroll report. Wage growth, or the lack of it, is a more pressing concern. Average Hourly Earnings posted a small gain of 0.1%, missing the estimate of 0.2%. This was down from 0.3% in the previous report, and matched the weakest gain seen in 2017. The lack of wage gains has impacted on inflation levels, which remain well below the Fed's inflation target of 2%. Soft inflation has dampened enthusiasm for a final rate hike in 2017, with the odds of December increase pegged at just 37%.
Candlesticks and Ichimoku Trade Ideas Performance Update
5 positions were entered among all 4 currency pairs with total profit of 184 points and the positions are listed below:
28 Aug : USD/JPY - Long at 109.25, exited at 109.00 (- 25 points)
30 Aug : EUR/USD - Long at 1.1965, exited at 1.1930 (- 35 points)
31 Aug : GBP/USD - Long at 1.2855, exited at 1.2955 (+ 100 points)
1 Sep : USD/JPY - Long at 109.55, exited at 109.99 (+ 44 points)
1 Sep : EUR/USD - Short at 1.1975, exited at 1.1875 (+ 100 points)
| 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 +100
Oct
Nov
Dec
Y-T-D + 407 +313 +227 - 9
Trade Idea Wrap-up: USD/CHF – Stand aside
USD/CHF - 0.9566
Most recent candlesticks pattern : N/A
Trend : Down
Tenkan-Sen level : 0.9580
Kijun-Sen level : 0.9603
Ichimoku cloud top : 0.9614
Ichimoku cloud bottom : 0.9598
Original strategy :
Buy at 0.9540, Target: 0.9640, Stop: 0.9505
Position : -
Target : -
Stop : -
New strategy :
Buy at 0.9520, Target: 0.9620, Stop: 0.9485
Position : -
Target : -
Stop : -
The greenback opened lower today and further consolidation below last week’s high of 0.9680 would be seen, hence downside risk is for another fall towards 0.9539-47 support area, however, if our view that low has been formed at 0.9428 last week is correct, downside would be limited to 0.9520 and bring another rebound later. Above 0.9653-55 resistance would bring another test of 0.9680 but break there is needed to add credence to this view and extend gain to resistance at 0.9698-99 which needs to be penetrated to retain bullishness for headway to 0.9730-40.
In view of this, would not chase this rise here and would be prudent to buy dollar on further subsequent retreat. Below 0.9515-20 would risk weakness to 0.9490-00 but still reckon downside would be limited to 0.9450-60 and said support at 0.9428 should remain intact, bring another rebound later.
Trade Idea Wrap-up: GBP/USD – Stand aside
GBP/USD - 1.2954
Most recent candlesticks pattern : N/A
Trend : Near term up
Tenkan-Sen level : 1.2947
Kijun-Sen level : 1.2954
Ichimoku cloud top : 1.2940
Ichimoku cloud bottom : 1.2924
New strategy :
Stand aside
Position : -
Target : -
Stop : -
Although Friday’s anticipated rally has justified our bullishness, lack of follow through buying on break of previous resistance at 1.2979 suggests upside would be limited to 1.3000 and price should falter below another previous resistance at 1.3032, risk from there is seen for a retreat to take place due to loss of near term upward momentum.
In view of this, would not chase this rise here and would be prudent to stand aside for now. Below 1.2930 would risk test of support at 1.2905 but only break there would signal top has been formed at 1.2996 instead, bring subsequent fall to 1.2875-80 and later towards said support at 1.2852.
Trade Idea Wrap-up: EUR/USD – Sell at 1.1955
EUR/USD - 1.1913
Most recent candlesticks pattern : N/A
Trend : Up
Tenkan-Sen level : 1.1903
Kijun-Sen level : 1.1889
Ichimoku cloud top : 1.1912
Ichimoku cloud bottom : 1.1902
Original strategy :
Sell at 1.1955, Target: 1.1855, Stop: 1.1990
Position : -
Target : -
Stop : -
New strategy :
Sell at 1.1955, Target: 1.1855, Stop: 1.1990
Position : -
Target : -
Stop : -
Although the single currency staged a brief bounce to 1.1980 on Friday, the subsequent anticipated retreat suggests the rebound from 1.1823 has ended there and consolidation with downside bias is seen for another fall to this level, break there would add credence to our view that top has been formed at 1.2070 earlier and extend the fall from there to 1.1815-18 (61.8% Fibonacci retracement of 1.1662-1.2070), then 1.1790-00 but downside should be limited and previous support at 1.1773 should remain intact.
In view of this, we are looking to sell euro again on recovery as 1.1950-55 should limit upside. Only break of said resistance at 1.1980 would abort and signal the fall from 1.2070 has ended at 1.1823 yesterday, bring further gain to 1.2000 and possibly towards 1.2025-30.
Trade Idea Wrap-up: USD/JPY – Stand aside
USD/JPY - 109.50
Most recent candlesticks pattern : N/A
Trend : Near term up
Tenkan-Sen level : 109.58
Kijun-Sen level : 109.85
Ichimoku cloud top : 110.12
Ichimoku cloud bottom : 110.03
New strategy :
Stand aside
Position : -
Target : -
Stop : -
The greenback opened lower today and has remained under pressure, suggesting top has possibly been formed at 110.67 last week and downside risk remains for weakness to 109.15-20 (61.8% Fibonacci retracement of 108.27-110.67), however, break there is needed to add credence to this view, bring further fall to 108.95-00, however, reckon 108.55-60 would remain intact.
On the upside, expect recovery to be limited to 109.80 and 110.00-05 should hold, bring another retreat. Only a firm break above resistance at 110.49 would revive bullishness and signal the pullback from this week’s high of 110.67 has ended, bring retest of this level, break there would confirm the rise from 108.27 low has resumed and extend gain towards previous chart resistance at 110.95 later.
Dollar Marginally Softer on Korea Uncertainty
- European equities recovered partially from initial losses as risk off sentiment eased without disappearing completely (equities about 0.3% lower). Gold moved sideways after opening higher, while the yen is off its intra-day highs. Bonds are little changed and so is EUR/USD.
- The nuclear test by North Korea and its potential geopolitical effects dominated trading. The absence of US traders and the dearth of the market calendar kept trading flows very thin.
- China's central bank said initial coin offerings illegal and asked all related fundraising activity to be halted immediately, issuing the strongest regulatory challenge so far to the burgeoning market for digital token sales. It also said digital token financing and trading platforms are prohibited from doing conversions of coins with fiat currencies.
- Steven Mnuchin is embracing the idea of not letting a serious crisis go to waste and that could be good news for Treasury bill holders. With the federal government's funding headroom dwindling by the day and rates on some vulnerable short-term securities climbing, the Treasury Secretary is pushing to wrap together a U.S. debt ceiling increase with the government's Hurricane Harvey aid package
- Norway's sovereign wealth fund proposed sweeping changes to its $333 billion bond portfolio, including dropping the Japanese yen, emerging markets and corporate bonds, as it beefs up on liquidity amid an expansion of its stock holdings. It proposes to diminish its bond index from 23 currencies to only include dollar, euro and pound.
Rates
German Bunds in limbo
Trading was dull today, as US markets were closed and the eco calendar nearly empty. Attention turned to the North Korean test of a powerful H-bomb and on the upcoming ECB meeting. The North Korean nuclear test triggered demand for haven assets in Asia. The Bund opened consequently higher but couldn't capitalize enough to trigger a directional rally. Equities opened much lower, but immediately climbed higher after the opening, easing part of the initial losses. The Bund future traded sideways in a 25 tick range with most activity linked to the contract rollover. Gold traded sideways, safeguarding overnight gains. The yen is off its strongest overnight levels. Concluding: bonds are barely impacted by the risk-off sentiment that eased, but didn't completely disappear. Traders want to verify how US markets will react to the geopolitical crisis.
In a daily perspective, German yields drop up to 1 bp the curve. across The 30-yr yield lags (flat). The modest easing of the risk aversion translated in a 2-to-3 bps spread widening for Spain and Italy (10-yr), while the Portuguese spread fell 1 bp. Moody's upgrade the outlook of the Portuguese Ba1-rating had little effect. Spain and Italy outperformed despite fresh supply later this week.
Currencies
Dollar marginally softer on Korea uncertainty.
The tensions on the Korean peninsula was the only driver for global FX trading as there were no important eco data and as US investors were absent in observance of the Labour Day Holiday. The dollar was slightly in the defensive, but reversed most of the intraday setback as the immediate impact of the events in Korea eased during the day.
During the weekend, geopolitical risk returned to the forefront as North Korea tested a new nuclear bomb on Sunday. Major regional equity indices lost about 1%. China outperformed. USD/JPY opened sharply lower in the 109.25 area, but the pair already returned to the 109.75 before the open of the European markets. The North Korea tensions had little impact on EUR/USD. The cross rate held very tight range near the 1.1880 level.
The tensions around North Korea also caused a risk-off repositioning at the start of European dealings, as there was no other news with market moving potential. European equities opened with substantial losses, core yields declined marginally and the dollar lost a few ticks. EUR/USD rebounded to the 1.1922 area. USD/JPY dropped from the 109.80 area to fill bids at around 109.40. However, the market reaction function to the issue was quite similar to what happened of late. The impact of the 'North Korea event risk' soon lost its grip on global price action. The dollar decline didn't go far and the dollar gradually reversed most of the early session losses. With US market closed in observance of the labour day holiday, interest rate differentials had no role to play as a driver for FX trading. EUR/USD trades currently around 1.19. USD/JPY is changing hands in the 109.70 area. For now, Korea remains a secondary issue for global (Fx) trading, but we still want confirmation from the US tomorrow.
EUR/GBP hovers listless around
Sterling traders experienced a dull , uneventful trading session today. The UK currency traded slightly softer this morning as the overall risk-off sentiment weighed slightly more on sterling than on the dollar and the euro. The UK construction PMI (51.1) also showed a further loss of momentum. However, both the moves in cable and in EUR/GBP were technically insignificant. EUR/GBP returned temporary to the 0.9218 area, but trades currently again below 0.92. Cable trades around 1.2950. For now, sterling feels no additional headlines from the stalemate in the Brexit negotiations.
USD/CAD to Hold Within Narrower Range Due to US Labor Day Holiday
The pair was slightly higher on Monday and recovered a small part of strong losses from Thu/Fri, when the greenback fell over 1.8% against Canadian counterpart in two days. Bearish extension on Friday broke below previous base at 1.2413 and posted fresh 26-month low at 1.2339, last seen at the end of June 2015. Overall picture remains firmly bearish as the pair completed short-term correction from 1.2413 (25 July low) to 1.2778 (15 Aug high), signaling continuation of larger downtrend from 1.3793 (05 June peak). Today's action is likely to hold within narrower range due to US Labor Day holiday, but the price action may remain choppy and directionless until Wednesday, awaiting for the outcome of Bank of Canada's policy meeting, which is the key event for Loonie this week. Markets see 50/50 chance for another 0.25% hike after the BoC increased interest rates in July by 25 basis points from 0.50% to 0.75%. Possible scenarios see CAD jumping if BoC hikes and expect Loonie to drop if central bank keeps rates unchanged. Break below Friday's fresh low at 1.2339 could trigger extension towards 1.2124 (18 June 2015 trough), possibly to 1.2036 (50% retracement of larger 0.9384/1.4688 2011/2016 uptrend) on stronger bearish acceleration. Conversely, fresh acceleration higher may revisit 1.2501 barrier (daily Tenkan-sen) and may extend towards 1.2558 (daily Kijun-sen) on break.
Res: 1.2425; 1.2501; 1.2539; 1.2558
Sup: 1.2374; 1.2339; 1.2274; 1.2188
