Euro Hits 2 Year High but NK Missile Fire is the Big Story

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Euro Hits 2 Year High but NK Missile Fire is the Big Story

Daily FX Market Roundup 08.28.17

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The U.S. dollar traded lower against all of the major currencies today and extended its losses after North Korea fired a missile over Japan. President Trump has yet to respond, but he’s certainly not going to be happy with their actions so traders need to beware of further risk aversion as NK takes a risky step that could lead to more than just sanctions. USD/JPY dropped below 109 and looks poised to test its August low of 108.60. If Trump responds with more than harsh words for North Korea, we could see USD/JPY drop as low as 108. At the same time, investors continued to digest Fed Chair Yellen’s lack of enthusiasm at Jackson Hole. U.S. yields turned lower and data fell short of expectations with the trade deficit widening to -65.1B form -64B in the month of July. Her lack of insightful optimism made many investors weary of the U.S.’ economic outlook and the prospects for Friday’s non-farm payrolls report. According to the latest economic forecasts, job growth and wage growth are expected to slow and that proves to be true, it could accelerate the decline in the U.S. dollar. The Conference Board’s consumer confidence report is scheduled for release tomorrow and on Wednesday, President Trump is expected to make a major tax reform speech. Although we don’t anticipate any material progress on tax policy, Trump will use this opportunity to share his goals, shift the conversation away from his Charlottesville comments and try to convince the public that major changes are coming for the tax system.

Meanwhile euro hit a fresh 2 year high against the U.S. dollar.
It should only be a matter of time before 1.20 is broken and when it is we think EUR/USD could hit 1.22 and possibly even 1.25. The longer target is a stretch but realistically, above 1.20, there is no technical resistance for EUR/USD until 1.25. Historically, 1.25 still puts the pair less than halfway between its 2008 1.6038 high and last year’s 1.0352 low. Also the 5-year average value of EUR/USD is around 1.21, so 1.25 would not be a significant overvaluation. Of course, the factors affecting the Eurozone economy are very different today than 5 years ago. In August 2012, inflation was closer to 1.7% and now it is at 1.2%. Britain has decided to leave the European Union, terror attacks are happening more frequently and the U.S. has an unstable President at the helm so the European Central Bank has a vested interest in preventing rapid gains in the currency and taking only baby steps towards policy normalization. The ECB is widely expected to announce that they will start winding down their bond buying when they meet on September 7th. Governor Draghi had the opportunity to talk down the currency on Friday at Jackson Hole but he chose not to do so and in saying nothing, he effectively gave EUR/USD bulls his blessing to take the currency higher. So in the 1.5 weeks between now and September 7th, EUR/USD will be trading with an upward bias unless the ECB steps in and expresses concern about the level of the currency. There are a number of Eurozone economic reports scheduled for release this week. The focus will be on inflation and German employment. Even if these numbers fall short of expectations, buyers are likely to use that opportunity to buy the euro at lower level.

Sterling also performed well today, trading higher for most of the NY session as London traders enjoyed their holidays.
No U.K. economic reports were released but as reported by our colleague Boris Schlossberg, “Finally, after weeks of relative weakness cable could see the light of day if markets begin to realize that a hard Brexit is unlikely. The latest cable positive news came from the Labor party which suggested that UK should remain in the EU for at least 4 years as Brexit terms are negotiated. There is now a growing body of evidence that the majority of the British population is beginning to realize the devastating impact that a hard Brexit would have on the UK economy and that could create a more conciliatory environment in negotiations with EU. Cable gapped higher to 1.2940 in early Asian trade only to give up the gains Europe, but with UK corps at full force tomorrow the pair could see a revived bid on improved sentiment and make a run towards the 1.3000 level as the week proceeds.”

Many investors may be surprised that Hurricane Harvey’s destruction spilled over to oil prices.
Although a number of major Gulf Coast refineries were taken offline, investors reacted to the demand impact of the Hurricane. Apparently it is now believed that refineries will demand less oil as they remain shut and take longer to come back on line. However if we take a look at how crude oil prices behaved during Hurricane Katrina, we saw prices initially rise from $65 a barrel to $67.50 at the start of the storm, then drop back down to $66 a barrel before soaring to $70 the day before the storm officially dissipated. All of this happened within a one week period. Similar price action can be seen during Hurricane Rita. Oil prices fell at the onset then jumped 6.97%. So while crude prices have fallen today, we expect a recovery in the days to come especially if the U.S. dollar declines. Technically however USD/CAD has resistance at 1.2550, so this latest move could extend for some time before it finally stabilizes. The Australian and New Zealand dollars ended the day higher versus the greenback. With no economic reports released from either country, their strength can be attributed entirely to U.S. dollar weakness but both currencies are at risk if North Korea induced risk aversion becomes a bigger story.

Kathy Lien
Managing Director

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