Haven Assets Gain as Geopolitical Concerns Build; Euro Defensive

  • Yen and Swiss franc surge as North Korea steps up rhetoric
  • Germany faces lengthy negotiations after Merkel’s hollow win

German Election Result Sees Euro Moving Lower

The dollar and haven currencies advanced as geopolitical concerns were reignited by a belligerent statement from a North Korean official.

North Korea’s Foreign Minister Ri Yong Ho said President Trump’s recent comments amount to a declaration of war and that the country has the right to shoot down U.S. warplanes that approach its borders. The rhetoric added to uncertainty that followed a less-than-resounding victory by Germany Chancellor Angela Merkel in a weekend election. Merkel’s bloc garnered about one-third of the vote, likely requiring extended negotiations to form a coalition.

  • Apart from losses against the yen and Swiss franc, the dollar gained against every other G-10 peer, even as haven flows boosted USTs. The yield on the 10-year fell as low as 2.213%, its lowest in about a week. Risk-loving currencies such as the Australian and Canadian dollars relinquished overnight gains and the pound also fell. The Bloomberg dollar index rose as much as 0.44% to its highest since Sept. 1. The yen earlier was little impacted by PM Abe’s confirmation that he will dissolve the lower house later this week and call a snap election, said to be set for late October
  • Prior to the North Korea comments, risk appetites were already subdued as traders pondered the Germany election while awaiting a wealth of central-bank speakers. A slew of Fed officials appear this week, including Chair Yellen on Tuesday, and BOC’s Poloz, BOE’s Carney and ECB’s Draghi are on tap later in the week. Headline risk may encourage some traders to keep their powder dry as the month and 3Q wind down. Fed’s Dudley said Monday that the Fed will likely keep tightening policy while noting that import prices are rising
  • USD/JPY fell to a daily low of 111.48 before bouncing back above the Ichimoku cloud top at 111.54. The move briefly breached support from Friday’s low at 111.65 and filled residual bids around the interim low at 111.95. USD/JPY may find tech support at the 100-DMA of 111.11, while stop-loss sell orders are positioned below 111.00, according to a trader in London. A breach of the 100-DMA may allow losses toward the 55-DMA at 110.59
  • The euro fell as much as 1.4% vs the yen, its steepest drop since December, and almost 1.5% vs the Swiss franc. Leveraged accounts were reported by several traders as euro sellers after it became evident that voters gave Merkel’s party its worst performance since 1949 and made the nationalist AfD the first far-right party in parliament since the aftermath of World War II
    • It’s “now or never,” for the EUR to correct lower, SG’s Kit Juckes wrote in a note to clients. “1.1700 is a natural chart target and may well be tested in the weeks ahead”
  • EUR/USD was trading not far from the daily low at 1.1832, the decline cushioned by a thick layer of bids that extend from 1.1880 all the way to 1.1800, according to traders in Europe and London. Draghi, who speaks again later this week, reiterated that a broadening expansion in the euro area is expected to eventually boost inflation, though the ECB recognizes that a significant degree of stimulus is required to achieve that goal
  • Traders are divided on whether a dovish tone from Draghi, coupled with further Fed reiteration of 2017 rate-hike hopes, will be sufficient to drive EUR/USD through the lower end of its recent trading band of ~1.1800/1.2100. A break under 1.1800 may trigger significant stop-loss sell orders, one trader said. Seasonal factors that have seen USD rise in the final quarter of recent years may support the greenback, though uncertainty surrounding Trump’s fiscal program offers a counterweight
  • GBP/USD fell to a fresh daily low of 1.3431 after the EU’s chief Brexit negotiator, Michel Barnier, demanded clarification on U.K. concessions before starting trade talks. GBP/USD briefly fell below Friday’s 1.3451 base seen after Moody’s cut its U.K. credit rating and changed the outlook to stable. The pound relinquished all gains from a rebound to as high as 1.3571 during European hours
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