FX & North Korea

What do we expect in the upcoming week in the FX market. Well alot depends on tensions in the Korean peninsular. Last week was dominated by rhetoric from our favourite POTUS, which was around brute force and intimidation - ""Fire and Fury like the world has never seen before".

If the issues with Nth Korea escalate further then we should see more safe haven buying - yen, gold, suissy. US yields also told a story. On the other hand if things settle then USD may have a reprieve against the yen. Gold broke a significant trendline last week and it should continue north even if deescalation in Nth Korea given the benign inflation outlook in the US which still persists.

Euro is still showing resilience with dip buying occuring down around 117 but the key here was the CPI data released on Friday which saw the euro spike around 70-80 pips and closed the week at 11823 (50pips up on the previous weeks close). Look out for FOMC minutes being released to give a better picture on what members are thinking on importance of 2% inflation target and also there should be a clearer picture on what EZ are also thinking in terms of QE tapering.

Its August so trading could be thin this week so not expecting huge moves (Nth Korea excluded) so becareful of any whippy action. Out on alimb here but see euro trading between 119 and 11776 this week. Good luck to all.

Where to for the Euro !!

The Euro has had a great rise in 2017 to date and it would appear nothing can stop the common currency. There is good reason for this including
1. Being depressed for a long time - it has fallen from around 1.60 so on a technical basis needed some kind of pullback toward the 38.2-50% fibo of the fall from 1.40 at least in the medium term
2. USD weakness - Yellen and Co have been a bit doveish of late with muted inflation which has not been helped by low oil. Yes the US continues to talk about the rate trajectory still in place but inflation and Trump is making it hard to maintain a hawkish tone
3. Trump - the reflation trade started with tax cuts and healthcare reform and a very pro business stance. But nothing can get done and a non performing govt is starting to weigh
4. Eurozone whist not out of the woods yet has shown vast improvement over the past few years and now Draghi has started to mention reduction in QE. Whilst he was cautious in his speech last week the market reaction was having none of it - take the cues from market movers - don't fight it.
5. In a report by HSBC last week they are forecasting 1.20 by year end - Why?. Well their basis is that fast money ie specs have been quick to jump on the euro long bandwagon whilst medium and slow money has not yet put any force behind it. That is portfolio managers are still underweight euro stocks relative to the past and larger wealth and pension funds are yet to really increase reserves in the Euro. Thus when the last two categories start to increase allocation then this will be supportive. Hint: watch flows for uptick.
6. COT reports showing euro long positioning but not overstretched so still headroom.

Wow - I'm convinced but what about the downside. Yes need to be wary of US political issues being resolved as well as possibility of market thinking the run up has been to fast and coupled with more good numbers out of US such as GDP and an increase in oil may see a pullback. As always there is time to be all in but that doesn't mean being silly.

In terms of targets on the way up use the major fib lines especially where the fibo down from 1.60 and 1.40 are at similar levels.

Did that just happen !

Well talk about excitement from trusted financial reporters getting it wrong to bears getting upset, the Euro took off. Everyone from Goldmans who saw a 200 to 300 point drop to the average punter expected the Euro to fall on some anticipated very bearish Draghi comments to come. But the markets said No; not today and the depo rate was only cut 10basis point and the euro flew north.

As mentioned last week every participant is hanging off the mere breath of Central Bankers and when the market is disappointed this time of year there is going to be a lot of pain including yours truly.

Lucky for me I heeded my own advice and overall I came out unscathed with my long aud/usd being able to offset my losses on a Euro short but could have played smarter. Anyways that's the game where in lose some win more.

I will be looking for some Euro short opportunities and build a position up but be careful as we are likely to see some volatility over the coming days especially if NFP pulls a big surprise.