Fundamental Analysis 2017.08.29 – Markets React to N. Korean Missile Launch with Risk-off USD

A renewed N. Korean threat – a missile was launched over Japan causing a risk-off market response. As expected safe havens such as CHF, JPY and metals benefited from the reaction, as more risky currencies – like the Australian dollar– lost. Asian stock markets, also as expected, slipped during early this morning, as bond yields also dropped.

EUR/USD trend hasn’t changed as the USD weakens the EUR seems to strengthen.

The trend is unlikely to change unless something comes to affect the EU – as the US was affected. This could be in the form of diplomatic frictions, political instability (most likely pertaining to Brexit) or negative fundamental/technical data.

GBP (the loser of the year) actually managed to gain across its counterpart USD. This could even be considered a paradox considering yesterday’s less than positive Brexit negotiations. Both Germany and France are advocating coming to an agreement over the UK’s obligations towards the one-currency union, before any trade agreements are even discussed and Michel Barnier, Chief Brexit negotiator for the EU, stated that the UK should approach Brexit with much more urgency. Of course an unsubstantiated.

Markets reaction to Hurricane Harvey seems like a mixed bag. The most significant effect is putting multiple oil refineries out of commission. As a result gasoline went up substantially in US. The inverse of that dynamic is a lowered demand for crude, causing the gap between the prices of WTI and Brent to widen. This gap is of course closely correlated to the adverse weather conditions and could easily turn around once skies clear.

Today’s market
On the other side of the Atlantic, on-going negotiations between the UK and EU – should affect GBP with less influence on the EU. The first leg of the talks yesterday – didn’t go as well as the UK negotiators would have liked and any further news will also likely be negative which obviously will negatively impact GBP.

When Wall Street finally wakes, traders will be on the lookout for Canada’s industrial product prices but they won’t be expecting positive results, the speculation is that it will be significantly lower than the previous report period. This is on-top of the previous month’s 1.0% drop – bringing the focus on the 1.2% YoY, inflation – and fueling speculation whether it can keep up with the BoC’s target of 1% - 3%. This type of sentiment is unlikely to be beneficial to CAD.

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