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.

US data – NFP

Last week was a bit of a mixed bag when it comes to employment numbers in the US. NFP broadly in line with expectations and trend. Unemployment fell to a level below the Fed target and all sounds rosy. However the fall in unemployment was mainly due to a fall in the participation rate which of course is not so positive. However all in all the prints were OK and should not dampen the Feds spirits to give us all a very merry Christmas hike. In fact markets are now pricing in 3 or 4 rate increases to come b4 end 2018 so again we will have the questions in 2017 of whether the next meeting will bring a hike or not. This for us is fun of course as brings plenty of opportunities for trading. As the Bureau of Labour Stats graphs show toto is a long way from 2010

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