A further escalation of the North Korea set of circumstances as another missile test looms, coupled with both Russia and China expressing little appetite to concede to strong sanctions, has left the global markets engulfed by geopolitical turmoil and in a state of heightened risk aversion.
US traders returning from the Labor Day weekend wasted little time to catch up on the weekend North Korea headlines driving both US equities and bond yields lower. Predictably this had a spillover effect on the FX markets, as traders continued to take shelter under the JPY and CHF umbrellas. Without question, it was this Trump Tweet :
“I am allowing Japan & South Korea to buy a substantially increased amount of highly sophisticated military equipment from the United States.”
That sparked the initial bid on US Treasuries and started the ball rolling south on the USDJPY, but it was Fed governor Lael Brainard that left the dollar wobbling and as prone as bop bag. While traders have grown accustomed to Brainard's overly dovish banter , it was her unwavering comments regarding inflation or the lack thereof that caught the most attention.
"We have been falling short of our inflation objective not just in the past year, but over a longer period as well. My view is that we should be cautious about tightening policy further until we are confident inflation is on track to achieve our target.”
While the risk aversion play is certainly weighing on USDJPY, it’s impossible to factor in just how much geopolitical risk should be priced into the current calculus given that recent headline flare ups have ended quickly. Nevertheless, an unabashedly dovish Fed Brainard was unquestionably the reason for the deeper USDJPY move into the 108s.
Fed members will continue to roll out comments this week, Kaplan on Tuesday and Mester on Thursday but it will likely be up to Dudley on Friday to do the heavy lifting for the interest rate normalization crowd.
The powerful New York Fed President Dudley is part of the Fed troika including Yellen and Fischer and is widely considered a key member of the Fed’s inner sanctum so that traders will side with his speech as the most significant of the lot. But whether he does provide some solace for both rates and the USD market is questionable after his decidedly guarded August 10 delivery.
Euro
The euro remains a bit of a sideshow to the broader risk aversion narrative, and the ECB uncertainty over the balance sheet taper timing is keeping bulls at bay.The pair remains in consolidation mode ahead of Thursdays key ECB .
Japanese Yen
Brainard’s dovish delivery has slid the buy on dip bids down to the all important 108.25-45 support levels as dwindling support remains for some Fed relief for the rates markets. However, with the geopolitical overhang keeping short term trader selling on rallies, the top side should remain limited in today’s APAC session.
Australian Dollar
Markets ignored the RBA statement as expectedly there was little new on offer but with both the stronger Q2 exports and a buoyant China PMI fresh in traders minds, Brainards dovish lean was all it took to send the AUD ripping higher.
But somehow this sense of deja vu is setting in with copper and base metals prices looking elongated and with a consistent RBA policy that likely remains on hold indefinitely, there will be some wood to chop to take out the key .8050 level. Domestic focus is on Q2 GDP that has a penchant to surprise on the upside. Could be an interesting session for the Aussie.
New Zealand Dollar
With all eyes in JPY and safe haven flow, the underdog NZD was the best performer during the Fed inspired USD weakness, likely driven by short covering as the market was looking for excuses to sell the dollar when the soft US durables report sealed the greenback's fate in NY trade.