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FX Market Risk-Off Moves Cool Off (As They Always Do)

FX Market Risk-Off Moves Cool Off (As They Always Do)

The relentless risk-off moves in currency markets appear to have abated somewhat after Wednesday’s pyrotechnics in Asia. The dollar took on a distinctly August inspired flavour in NY afternoon trading within extremely subdued ranges.

But looking at price action across asset classes, the North Korea entanglement remains the number one agitator. US ten year yield traded towards 2.2%, gold ripped through $1,277 per ounce in afternoon NY as equities have turned decidedly edgy amid the intensifying geopolitical and fiscal uncertainties.

Liquidity conditions have a way of exaggerating market panic, but when a cowardly act of terrorism was reported in Paris, it increased the markets’ anxiety level 10-fold as risk sentiment quickly devolved. But it will be yesterday Trump’s Bay of Pigs moment that will keep traders on edge.

However, we’ve seen this picture before and the geopolitical status quo usually returns to equilibrium fairly quickly. It should even more so this time after Secretary of State Rex Tillerson extinguished the raging political fires. CNN reported that Tillerson said that “nothing that I have seen, and nothing that I know of, would indicate that the situation has dramatically changed in the last 24 hours. Americans should sleep well at night.”

Traders are very keen to hear Bill Dudley, the Boss of the powerful NY Fed who will speak on Thursday and the markets are anticipating he will provide a key on Fed policy and impart some influence on global sentiment.Australian Dollar

The regional geopolitical risk overhang continues to weigh on the Aussie. But taxing liquidity conditions contributed to some outsized moves yesterday after the AUD was sideswiped by CNY and AUD data that marginally missed the mark. Yesterday’s aggressive selloff after Chinese CPI missed the mark was a combination of bad timing and low liquidity rather than anything else.

But the current risk averse mind set it aside. With the US “reflationaistas” coming to the fore after some seriously buoyant jobs data all but setting the stage for a robust US economic recovery, we may only be one solid US data point away from a big repricing of December US rate hike probabilities. A more aggressive Fed is the most significant headwind for the Aussie dollar bulls.

Euro

A short lived peak below 1.1700 raised a few eyebrows but with little follow through – the tried and tested buy the dip mentality ruled. Participation remains light as traders continue to look for larger position squeeze to get back long EUR positioning comfortably.

Japanese Yen

Recent moves are all about traders getting in front of haven yen repatriation flow on global risk aversion. And predictably those bets are unwinding after Secretary of State Tillerson doused the flame of fury.

Japanese investors, who hold considerable foreign investment exposures, are prone to repatriate on risk aversion. This, despite the proximity to North Korea. Until the missiles actually launch, this will continue to be the go to geopolitical risk averse investor mindset.

Korea Complex

With geopolitical tensions increasing on the Korean Peninsula, KRW could remain under pressure as the market should continue to engage USD longs until the pressures abate.

The KOSPI has been a real pain trade since the NASDAQ swoon. With the market turning sour on Korean assets in the wake of the latest brouhaha, investors will likely be in for more distress and sleepless nights before things get better.

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