Yen Leads G-10 Gains as N. Korea Missile Test Spurs Haven Demand

  • Aussie, krone drop on less-hawkish-than-expected central banks
  • Euro, pound swing between gains and losses in thin markets

U.S. Confirms North Korea Rocket Was ICBM

The yen outperformed its Group-of-10 peers on haven demand following North Korea’s missile test.

The Japanese currency rose against the dollar in early Asia-trading hours and added to its momentum after the revival of geopolitical tensions in the region. North Korea said it successfully test fired an intercontinental ballistic missile, which it said could hit anywhere in the world. The dollar dropped by as much as 0.6% to 112.74, before paring losses and rising above the 113.00 handle. The move off the lows was supported by leveraged names fading a euro-yen drop near 128.00 support, traders in Europe said.

Amid a sell-off in risky assets and European markets diving into the red, holidays in the U.S. kept trading in the majors at below-average sizes. The market focused on central bank decisions in Australia and Sweden, where policy makers sounded less hawkish than presumed, and both the Australian dollar and the krona suffered losses on the headlines.

  • The krona lost as much as 0.5% before paring its drop to stand 0.3% lower at 9.6773 versus the euro; Riksbank did remove easing bias as was widely expected, yet it mentioned that currency appreciation shouldn’t be too rapid
    • EUR/SEK had dropped by nearly 2% between June 28 and July 3, while the krona stands 1.8% higher on a trade-weighted basis since its year-to-date low hit on May 18
    • The pair failed to test resistance by 55-DMA at 9.7094, which needs to give away on a closing basis for EUR to resume its recent trend; one-week risk reversals moved sharply to 17bps in favor of SEK calls compared to 64bps hit Monday
  • The Australian dollar was on an impressive run since May 9, gaining more than 5%, before traders started trimming bullish bets since Friday; RBA didn’t join the recent chorus of hawkish central bankers, noting that consumption growth remains subdued
    • AUD/USD was lower by as much as 0.9% to 0.7592, on its widest two-day drop in more than a month
    • Support comes at 0.7584 where the 21-DMA lies
  • The pound traded within a 1.2917-1.2959 range; U.K. construction PMI missed expectations and forced cable to its day low, yet traders will focus more on the services one due on Wednesday
    • Another miss there could see important technical support at 1.2862-68 under pressure
    • Divergence within the BOE isn’t supportive of the pound either; while Vlieghe sees any premature hike as a bigger mistake than a late one, McCafferty says it would be "prudent" to start raising interest rates
  • The euro was lower for a third day but by less than 0.2% on Tuesday at 1.1345; price action was mostly driven through crosses, said the traders, who asked not to be identified as they weren’t authorized to speak publicly
    • Investors with long cash exposure seek protection through options while some outright supply seems to emerge as well, vol skew shows
    • A drop below the Draghi-speech breakout level at 1.1295 could see further pressure in the front-end, as one-week risk reversals trade above par for nearly a month
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