Seeking Alpha

A Big Sigh Of Relief

by: Dean Popplewell
Dean Popplewell
Currencies, macro, fixed income

By Stephen Innes

New York traders breathed a huge sigh of relief after the dollar deftly sidestepped a gaping chasm when North Korea didn't test H-bombs or launch ICBMs and the devastation from hurricane Irma was not of the apocalyptic scale some had anticipated.

On cue, the US equity markets rocketed higher, with the S&P closing in record territory, while the US 10-year yields pumped four bps higher to close at 2.13.

Now that the "storm has passed" and North Korea played the good man over their 69th anniversary, the question now is what's next for the beleaguered dollar, as some key themes are developing in the background beyond the current NK risk play and dovish Fed narrative.

A relief rally or not, the greenback has dodged the bullet once again.

Japanese Yen

Predictably, USDJPY was the biggest beneficiary, rising from 108.25 at yesterday's Singapore open to 109.49, taking out last Wednesday's high due to the unwinding of risk-aversion trades. It's safe to say that haven trades were a bit stretched, as traders could not get enough yen to whet their appetites last week when aversion trades were the rage, so the unwind is not too surprising given the lack of geo escalation over the weekend.

Investors in the JPY space will likely look favourably on the fact the UN Security Council has voted unanimously to step up sanctions against North Korea. Even if it's a watered-down version of the US proposal, it does have decisive support from both Russia and China.

However, the fate of the USDJPY extension will be Thursday's US CPI, and given we may have seen our high-water mark for US inflation, a tepid CPI print will pressure USDJPY lower.


After opening in Singapore yesterday at 1.2025 and flirting with 1.2035 in London, the euro prices headed straight down as traders started fretting about the lack of top-side follow-through, as an arguably stretched USD dollar short position made traders nervous. Also, the fact that USDCNH found a base after rallying hard on Friday when the PBoC reduced forward hedging margins cooled the greenback sell-off. But traders started trimming euro longs aggressively when a Reuters article surfaced that a report written by six European Central Bank members supported a very, very gradual rollback of the QE program. The dovish ECB narrative has always been an impediment to gains above the 1.200 level, as the doves are not happy with the rapid appreciation of the euro, more so given that the EU is still in recovery mode and a strong euro hurts productivity.

Australian Dollar

The Aussie is slipping lower on the back of the USD recovery overnight. As for the regional sentiment, the greenback was also buttressed by a rebound in USDCNH after the pair rallied from a multi-year low when the PBoC reduced the onshore FX risk reserve requirement from 20% to 0%. While this does not signal or is not intended to curb RMB appreciation, it gave rise to consolidation, and traders were more apt to book profits amid crowded positions. Similarly, extended long Aussie positioning also turned for the exits.