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Event Risk Trumps FX Fundamentals

Published 07/21/2014, 07:05 AM
Updated 03/05/2019, 07:15 AM

The reality is that geopolitical events are 'front and center,' firmly catching the attention of investors and all asset classes. To date, favorable U.S earnings have been put aside while markets remain focused on real time events in the aftermath of the Malaysian plane crash in Ukraine and the continuing violence between Israel and the Palestinians in the Gaza Strip. The aggressive search for safe havens trading strategies has temporarily fallen since the initial shocks of late last week. Market and investors are seeking clearer guidance from authorities before pursuing any aggressive strategies.

Asian bourses edged higher overnight as investors set aside some of their geopolitical concerns for the moment to focus on the generally upbeat flow of U.S. corporate earnings ahead of a host of results due this week. However, trading volumes remain very light, as Japanese markets took a holiday. Expect Europe to report nothing different as they wait for markets stateside to open.

EUR/USD

The next move

The sharp swings and the uptick in intraday volatility are certainly a stern reminder to investors to remain 'fleet footed' and not 'marry any particular position' when volumes remain an issue especially after weeks of calm. There are obvious growing tensions between Russia and the West and the markets will not make a move until they have some concrete evidence. The harsh reality is that during the first half of this year, geopolitical events have had a relatively short lifespan and investors seem to need more assurance before the next move. While the crisis in Gaza has sent oil higher on concern of production risks in the Middle East, gold is having trouble recapturing their risk aversion high print of late last week ($1,326). Participation and lack of physical market interest is finding it difficult to push various asset prices in either direction.

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GBP/USD

FX technical breakouts on pause

As we head stateside, currency technical levels remain in focus following last Friday's tests for the EUR and GBP both outright and on the crosses. There has been no sustained breakout just yet, especially for the 18-member single unit, which tested and slightly breached the lower end of the trading range at the €1.3500 level at the end of last week. For many, with the pair having managed to hold above the pivotal January low of €1.3477 will allow for more consolidation before the next onslaught with purpose.

Ongoing geopolitical events should leave the EUR vulnerable; especially ahead of a EU foreign ministers meet scheduled for tomorrow to discuss/decide on any further sanctions against Russia. Market participants are required to follow both the treasury and bund yields for clues. Currently, yield differentials are also hinting that the EUR could come under renewed fresh pressure with German 10-year yields probing fresh historically low-levels (Bund 10's +1.16%, U.S 10's +2.28%).

NZD/USD

RBNZ Wheeler could surprise

The dollar majors are relatively flat from Friday close levels, but one or two have tried to make an exception. On the fundamental front this week, it is a relatively light calendar internationally - markets will be taking most of their trading cues from breaking news items. However, investors will to watch to see if the Reserve Bank of New Zealand (RBNA) increases its key interest rate for a third-time this coming Wednesday. The kiwi (NZD$0.8700) was one of the 'exception' currencies in the overnight session that tried to trade through some key psychological resistance levels.

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Do not be surprised, that outside of second-tier economic data, the market will be expected to adjust positioning going into the RBNZ rate decision as they do all Central Bank rate announcements. The futures market is pricing in a +75% chance that Governor Wheeler at the RBNZ will raise interest rates again this week to +3.5% - if the CB decides to pause until at least December, there will be a 'few' investors wanting to unwind their long NZD/USD positions.

USD/JPY

In Japan, investors will look to the June merchandise trade and consumer prices to gauge the impact of the country's April’s sales tax increase. Has PM Abe got it correct? Elsewhere, the July flash-PMI's for China, Japan, the Eurozone, Germany, France and US will also be needed to be interpreted - however, expect event risk to trump all risks.
USD

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