Unexpected 4th of July Fireworks
With the US markets closed for Fourth of July festivities, it was a somewhat directionless overnight session due to lack of participation, but the overriding tone is cautionary with a touch of risk off in the wake of a highly provocative North Korean test of an intercontinental ballistic missile. A topic that will be atop of the G-20 agenda which begins on Friday as North Korea attempts to puts their ICBM and Nuclear-tipped bargaining chips on the table.
The escalation in geopolitical tensions was quickly tempered after Russia and China led the global outcry for both US and South Korea to agree to a Chinese-led de-escalation plan.With cooler heads prevailing, the market quickly retraced the original headline panicked clamouring for scarcely offered haven assets in holiday thinned-trading conditions.But given the immensity of this latest crisis and G20 looming we’ve not heard the last on this front.
On the currency markets, there were pockets of interest as the CAD remained the markets darling thanks to both surging oil prices and the Bank of Canada’s hawkish tone. While the Aussie fell out of favour after the RBA baulked at stepping in line with the chorus of hawkish central banks and issued more dovish than expected statement
The Aussie remains on its back after a heavy sell-off when the RBA failed to live up to expectations and join the policy convergence club that had traders clamouring for top side exposure in G-10 currencies believing formal policy coordination was afoot. While the global policy convergence narrative will eventually play out the RBA has quashed the notion of a consorted rate rise amongst global central banks.While the RBA stuck to their neutral guidance, there appears to be not one primary catalyst that has convinced the bank to alter that view and refused to remove the downside risk to interest rates
It’s evident the short term market was disappointed after speculators succumbed to the allure of riding a wave of shifting policy, but regardless of the RBA latest musing the tide is turning on global easy money policy, and it might be too early to give up on the Aussie dollar just yet.
The Forex market is taking a breather conscious of some potentially bullish US$ risk events on the horizon; primarily FOMC minutes and US payroll data this Wednesday and Friday respectively. So we expect the EUR to remain rather rangy.
With risk aversion lingering, headline risk, and no shortage of, will dominate USDJPY flow as we head towards Friday’s G20 summit keeping topside risk in check
Friday is looking l is looking like a very actionable day.