The USD U Turn
The markets instinctive response to the North Korean( NK) missile launch was decidedly risk-off in Asia and London. But the market tone markedly improved as traders adopted a “this too shall pass’ attitude.The dollar and US bond yields rebounded sharply as US equity investors returned en masse and US fixed income flows turned aggressive sellers of duration.
A boisterous US consumer confidence number, coupled with a much tamer response than anticipated from President Trump may explain part of the reversal. But with the impending US August jobs report and a mere seven basis points priced into a December rate hike, the NK risk-off induced move may have been far too aggressive for the underlying fundamentals, and the runaway price action slammed to a halt.
This week’s focus is now pivoting to the US PCE data on Thursday, and the monthly US labor market report due Friday, especially the earnings component. If one breaks down yesterday’s stellar US consumer confidence headline, the strongest metrics in the report were correlated with jobs, suggesting a strong NFP headline. But with bountiful US employment conditions, it’s possible we may see the elusive upward pressure on wages finally materialize
The EURUSD succumbed to its success when it failed to remain above the 2012 high of 1.2041. A reality check set in just as traders were making a case for EURUSD 1.2500. But the reality is the factors driving the EUR move do not seem to support market price action. The latest move has less to do with ECB tightening prospects but more about under bought EUR positioning on a breach of the psychological 1.20 level. Given the lack of fundamental drivers behind the move, traders will start to get nervous about possible ECB pushback
The USDJPY sell-off following the NK missile launch over Japan evaporated for now as dip buyers emerged despite the breach of the key 108.50.level. With UST yields likely to remain heavy, geopolitical concerns should stay in the forefront. As well, with the debt-ceiling showdown around the corner, USDJPY could fall under pressure just as quickly as it made last night’s U-turn off 108.27 level.
But with a toned down President Trump and the UN Security Council in closed door meetings with economic sanctions the preferred option, the world just feels like a safer place today, and investors are relishing the respite.