FX market outlook

FX market outlook

Posted on Monday, September 4 2017 at 8:48 am GMT+0000

Safe-havens gain demand as North Korea fires a hydrogen bomb; Gold tops at 11-month high amid rising geopolitical risks

It was another risk-off Monday for investors as North Korea was said to have fired its sixth and most powerful weapon on Sunday, driving the demand for safe-haven assets higher while the US markets were closed for the Labour Day holiday. Gold gained the most, hitting a fresh 11-month high during the Asian trading hours.

Yesterday, the North Korean regime announced that it had successfully tested a hydrogen bomb as a response to the US-South-Korean military exercise conducted last week. Although there was no independent verification whether the nuclear weapon was a hydrogen bomb, experts said that the earthquake of a magnitude of 6.3 Richter following the explosion, was ten times stronger than the tremor identified in previous tests, suggesting that use of a hydrogen weapon was a possibility.

Following the news, Donald Trump threatened on Sunday to stop any trade relations with nations collaborating with the North Korean regime, while referring to South Korea, he argued that “South Korea is finding, as I have told them, that their talk of appeasement with North Korea will not work, they only understand one thing!” Later on Monday, South Korea said that it was preparing further military drills with the US, while the UN National Security has scheduled a meeting today to discuss additional sanctions against North Korea.  Moreover, Trump has requested to be kept informed on all available military options.

The dollar index which gauges the dollar’s strength against a basket of major currencies was trading lower by 0.20% at 92.62.

Dollar/yen weakened by 0.65% to 109.53 while dollar/swissie declined by 0.47% to 0.9601.

The pound edged down to $1.2953 despite the dollar’s weakness, as uncertainty around Brexit weighted on the currency.

The euro rose by 0.28% to $1.1891 ahead of the ECB policy meeting on Thursday, where central bankers are expected to keep interest rates unchanged. Regarding the reduction in asset purchases, the discussion is said to start only on Thursday but traders might have to wait until October for any announcements on the decision.

In other currencies, the aussie was in a downtrend after the Australian business data released earlier in the Asian session missed expectations. Business inventories dropped unexpectedly by 0.4% while analysts anticipated the figure to rise moderately by 0.4%. In the previous quarter business inventories posted a growth of 1.2%. Likewise, Australian gross company profits fell by 4.5%. This was compared to a 6% gross profit increase seen in the first quarter and a 4% decline forecasted.

The commodity-linked loonie gained some ground on Monday versus its US counterpart, as a number of key oil refineries in Texas, which were harmed by the costliest tropical storm Harvey (150-180 billion dollars), restarted their operations during the weekend. Moreover, the Bank of Canada (BOC) is scheduled to launch its next policy meeting Wednesday, where the markets expect the rates to remain steady. However, a rate hike is not completely out of the question, based on upbeat growth figures. Dollar/loonie was last trading at 1.2402.

Looking at commodities, oil prices were mixed, while gold which is considered a safe investment in times of risk aversion hit an eleven-month high as geopolitical tensions heightened between the US, North Korea, and Japan. WTI crude futures rose to $47.36 per barrel, while Brent fell to $52.40. The yellow precious metal topped at an eleven-month high of $1337.62 per ounce, up by 1.0%, amid heightened political tensions in the Korean peninsula.