In FX – Setting up for Perfect Storm of Risk?

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Market Drivers August 13, 2019
UK Labor in line
GE ZEW misses badly
Nikkei -1.117% Dax 0.48%
UST 10Y 1.64%
Oil $55/bbl
Gold $1524/oz
BTCUSD $11350.

Europe and Asia:
GBP UK Labor 28K vs.42K
UR GE ZEW -44 vs. -28

North America:
USD CPI 8:30

FX markets were quiet but clearly concerned about the growing sense of political and economic risks across the globe with risk-off currencies still bid into the London morning trade.

The primary hotspot is Hong Kong which has seen its airport face chaos for a second day in a row as protestors have shut down the main entryway into the city creating massive havoc for airlines and passengers. The uprising in HK is reaching a breaking point and there is growing concern that it becomes a geo-poltical nightmare if Chinese decide to use force against the city creating both a humanitarian and political conflict that could have global consequences.

There are no signs that either side is willing to give up and China implicit hope that protests would exhaust themselves are clearly not materializing.

All of this comes against a background of increasing trade tensions between China and the US as US deadline of 10% tariffs in September approaches. We could therefore see a perfect storm of political and economic tensions collide at the start of September if China interferes in Hong Kong at the same time as US puts more trade barriers against Chinese goods.

Little wonder then that risk-off pairs remain bid with USDJPY hovering near session lows at 105.16 as shorts eye the key flash crash lows of 104.56.

The move lower in USDJPY is a nightmare for Japan as well as it strengthens the country’s currency just as global trade is starting to slow. All of this is creating a vicious cycle of economic barriers that is beginning to create panic in the markets as investors fear that the global economy may come dangerously close to tipping into recession.

With economic data taking a backseat to headlines the FX markets are likely to be driven by equity flows and if US session sees further selloff key FX level could give way.

Boris Schlossberg
Managing Director

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