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FX Update: North Korean missiles fly over Japan!

The eagerly awaited Jackson Hole addresses by central bankers, Yellen and Draghi on Friday night failed to meet market expectations around supplying clues to the timing of tightening moves. Rate hike comments were side lined as they both appeared to work in parallel to deliver a clear message on a different (and perhaps slightly less market-sensitive) topic: financial system regulation. Both warned of the dangers of rolling back regulations put in place since the financial crisis. Yellen commented that “the balance of research suggest that the core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth.” In a follow up Draghi went on to state “When monetary policy is accommodative, lax regulation runs the risk of stoking financial imbalances. Regulators should be wary of rekindling the incentives that led to the crisis.” It certainly sounded as if they were both taking a jibe at the current US Administration’s policy suggesting that it may repeal large swathes of Dodd-Frank. Draghi also commented on the increased threat of protectionism. Given the comments by Yellen it would seem she is not angling for reappointment as Fed Chair when her term expires in February 2018. Market reaction saw U.S. stocks and Treasuries rise while the dollar sank after Janet Yellen’s speech didn’t take the hawkish tone some expected, with oil gaining as Hurricane Harvey churned up the energy-rich Texas coast. Conversely the euro touched the highest level in two and half years versus the dollar as traders showed signs of relief after Mario Draghi failed to talk down the value of the currency in his Jackson Hole speech. This week will bring some major data releases culminating in the US Non-farm payroll data for August on Friday (expt 170-185k increase) this is preceded by Q2 GDP estimates on Wednesday, as well as the ADP private payroll report (expected to show an increase of 200K). Just when geopolitical risks were abating, North Korea fired off more missiles, but market effect has been minimal at this stage, helped by Secretary of State Tillerson’s comments that the U.S. will continue to push for negotiations to de-escalate nuclear tensions on the Korean peninsula. However this morning’s missile launch across Japan may again ratchet-up risk-off trades, as already the JPY has increased sharply as safe haven trades regain favour.

The Australian dollar rebounded strongly on Friday against the USD, climbing quickly from around 0.7900 to 0.7962, its highest level since August 17 amid a decline of the US across the board. The greenback weakened after the release of Janet Yellen speech. The Fed’s Chair didn’t mention the economy, or signals about the path of monetary policy and this weakened the dollar. It again failed to hold levels above 0.7950 and opened yesterday down at 0.7935 around where it traded for most of the day, however overnight performance was impressive as it regained the 0.7950 level to make a 0.7972 4 week high against the USD. The news of the latest North Korean missile launch has seen the risk-off tone intensify and the AUD has been sold down to 0.7927 against the USD. This week will see some Aussie data, with building approvals (consensus -5% in July) and Q2 private sector CAPEX (+0.2%) in focus. Although the crucial Q2 GDP will be released to the market next week on 6 September, but we start getting the key inputs this week with Q2 inventories and operating profit as well as business confidence reads. The AUD/USD looked to be on track after the 0.7972 high to target the 0.8000 level but the sudden risk-off tone on the back of today’s Nth Korean missile launch has knocked the AUD on the back foot. If this week’s statistics are solid and more importantly the risk-off tone abates look for another attempted run to the 0.8000 level.

New Zealand
The New Zealand dollar after being on the back foot for most of this week has started on a more positive tone, climbing from 0.7230 to a high of 0.7263 over the last 24 hours…it is now back at 0.7240 after news broke of the Korean missile launch. The election cycle is now in full swing after the formal launch of the two main party’s election campaign last week. At the moment markets are taking little notice given the similar policy manifesto of both Labour and National, more importantly economic data continues to be solid although look for some decrease in market volumes in the final two weeks. We have terms of trade released on Friday for the Q2 which if coming in at 2.4% would show an annual gain of 12.6%, exceeding the peak last seen in 1973. Support at 0.7180 against the USD remains critical for the NZD, with a break below an indication that 0.7000 would be under threat, however we expect the NZD to consolidate around the current 0.7200-0.7250 range ahead of Friday’s US non-farm payroll data, the caveat being any substantive change in the Korean situation.

United States
Over the last few days attention has swung away from politics to the natural disaster that is enveloping Texas. Overnight U.S. stocks were mixed, oil declined and gold broke through $1,300 an ounce as investors weighed the damage from Tropical Storm Harvey. The euro held steady after rising to its strongest level since January 2015 against the dollar after the ECB president’s Jackson Hole comments. However politics are never far away, with President Trump’s threat to shut down the government over funding for a border wall focusing market attention on the issue of passing a spending measure and raising the debt ceiling. Although these are two separate issues, and it is unclear whether congressional leadership will try to tackle them separately, or combine them in a single bill. Given that the risk of a government shutdown appears material, the latter strategy would in our view be more likely to disrupt markets. If handled separately, we suspect that this September/October period will play out much like 2013, when the deadlines for passing a spending increase and raising the debt limit were somewhat similar. In that instance, risk assets experienced only modest declines, and recovered soon after. If it happened , this would be the first time in nearly 40 years that there could be a government shutdown when the same party is controlling both the legislative and the executive branches might lead to a further diminishment of hopes on the fiscal front, tax cuts, infrastructure spending —reinforcing yield declines and  potentially weaker US equities. Market data will also take centre stage over the week culminating in the US jobs data on Friday. It maybe that the headline non-farm payroll number, that is typically the focus is less important now, barring a significant surprise. This is because jobs growth has been notably steady. In 2016, the US created 187k jobs a month on average, this year the average is 184k.  In the past three months, US job growth accelerated a little (average 195k), and a reversion to the mean, which is what the median forecast anticipates (180k) is neither here nor there. The main point is that job growth remains impressive given the maturity of the business cycle. Look for the unemployment rate to remain pretty much unchanged around 4.3%. Currently the EUR/USD is trading around 1.1965 look for an extension to the 1.20 level and above over the next few days. Markets will be wary of pushing the USD too far ahead of Friday’s data.

United Kingdom
The UK pound staged a comeback on Friday after Fed Chair Yellen’s speech, rising above 1.2800 against the USD to 1.2857. It has built on those gains and is now at 1.2930. After weeks of relative weakness the more positive tone is due to the realization that a “hard” Brexit is increasingly unlikely, reinforced by comments from the Labour party, suggesting that the UK should remain in the EU for at least 4 years as Brexit terms are negotiated. The more general realization that a hard Brexit would have a devastating effect on the UK economy could well create a more conciliatory environment in negotiations with the EU. A new round of Brexit negotiations started yesterday. UK markets were closed yesterday for the last Bank holiday of the summer so GBP trading was subdued. With the GBP/USD currently at 1.2930 the tone remains positive but resistance is solid at 1.2965 which must be cleared for additional gains to 1.3000. We don’t expect significant gains beyond this level ahead of Fridays US jobs data. Conversely a break below 1.2910 would threaten 1.2875/50

After ECB head Draghi’s speech on Friday the EUR continued to build on the USD as the negative momentum triggered by central bankers on persisted, and US softer-than-expected data fuelled greenback’s decline. The EUR/USD extended gains to 1.1982 on Monday as political jitters within the Trump administration continue. It opened at similar levels this morning and then made a new two year high at 1.1984 after the news of the North Korean missile launch hit the news. The EUR has now backed off to the 1.1970 level and we expect price action to be consolidative around current levels until tomorrow’s revised US Q2 GDP figure and Fridays US payroll data.

The Japanese economy continues to look in better shape as improved data suggests that all the pump-priming done by the Bank of japan is starting to take effect. BoJ head Kuroda commented that policy will stay accommodative for some time yet. After trading around the 109.20-109.50 level last week the USD/JPY broke through the 109.00 level as investors sort the JPY safe-haven status after the NK missile launch this morning. It is currently at 108.75. For a bearish extension to occur, the USD/JPY cross needs to break below 108.60, this month’s low, exposing  108.12, this year’s low set last April. The pair needs to break above 110.00, on the other hand, to be able to gather some upward momentum, quite unlikely on the current dollar-negative scenario. We favour a 108.60-109.50 range over the next few days. North Korean issues have potential to move this cross.

The Canadian dollar started the week in a tight range against the US dollar as hurricane Harvey continues to wreak havoc in Texas and has hit the energy sector, forcing refineries to close and has sent gasoline prices soaring. The CAD is currently around 1.2505 against the USD having fallen from 1.2532 earlier as the USD staged a comeback near the end of the Monday trading session and is looking ahead at the economic calendar release for further support. Trump also sent a tweet calling the NAFTA approach of Canada and Mexico as very difficult. While Canadian Prime Minister Justin Trudeau spoke about Trump’s comments yesterday saying there was nothing new and vowed to remain at the negotiating table to modernize the agreement. Trade talks start on 1st September in Mexico. The main Canadian data due this week is monthly GDP on Thursday which is expected to have slowed after a strong first half of the year.

Major Announcements
•    Canadian Core Retails Sales 0.7% vs 0.0% expected
•    UK GDP 0.3% as expected
•    German IFO Business Climate index 115.9 vs 115.5 expected
•    US Core Durable Goods Orders 0.5% vs 0.4% expected

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