Dollar Dumped; EURUSD Barrels Through 1.2000 – Highest in 2.5 Years

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Market Drivers August 29, 2017
EURUSD pops 1.2000
NK send missible over Japan
Nikkei -0.51% Dax -1.40%
Oil $47/bbl
Gold $1328/oz.

Europe and Asia:
JPY Core Core CPI 0.4% vs. 0.2%
EUR FR GDP 0.5%

North America:
CAD RMPI 8:30
USD Consumer Confidence 10:00

A very volatile and active night of trade in the FX market with dollar getting battered across the board first on risk aversion flows in Asia and then on a massive breakout in the EURUSD which hit 2.5 year highs in morning London trade.

Traders barely had a chance to sit down at their desks in Asia when news hit the screens that North Korea launched a missile over Japan. The Japanese government determined quickly that the missile would fall into the sea and did not try to intercept it. Still, the rise in military tensions between the two countries cast a pall of risk aversion over all the capital markets and USDJPY plunged below the 108.50 level before recovering somewhat in late Asia trade.

The move in the yen was then followed by the breakout in EURUSD which broke above 1.2000 and then proceeded to squeeze all the way to 1.2070 before European desks even had a chance to open. This was a 2.5 year high in the unit as market sentiment against the dollar remains highly negative. With US 10 year slipping below 2.10% the markets have given up all hope of a Fed rate hike in December and as US yields continue to compress the selloff in the dollar has become relentless.

There is no doubt that sentiment against the dollar has become grossly overdone but momentum markets often have a mind of their own and dollar longs could see more pain ahead. Still, the fundamental picture in the US is not nearly as dire as the exchange rate would indicate and tomorrow’s data may provide some relief especially if the ADP figures and the US Q2 GDP estimate beat their marks. US growth remains relatively robust and the market may be significantly underestimating the chances of a Fed hike in December.

Fed funds futures are currently projecting only a 30% probability of Fed funds rate hike in December but if labor data and more importantly wage growth data continues to grow at the current 2.5% pace the prospect of another 25bp hike is quite high. For now, however, the markets are focused on the tumult in Washington and the upcoming battle over the debt ceiling increase which could add yet another layer of risk to dollar assets. Still, with US data likely to be sound the greenback is due for some short covering rally soon.

Boris Schlossberg
Managing Director

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