Risk Aversion Creeping Back in as USD Tumbles

Weekend Risk Heightened by North Korean Holiday

Risk aversion is creeping back into the markets on Friday as traders prepare for what could be another troubling weekend in the ongoing stand-off between the US and North Korea.

Weekend risk has been ramped up in recent months as tensions between the two countries has escalated. As recent as last weekend, a hydrogen bomb test from North Korea triggered safe haven flows at the open on Monday which caused a number of markets to gap at the open. It’s this that traders are concerned about, especially as the size of such gaps will be much larger should the outcome of these tests lead to a significant escalation.

What makes this weekend more concerning than others is that North Korea celebrates founding day on Saturday, which would be the perfect opportunity for it to display a show of strength, as it did on the same day last year. With that in mind, it will be interesting to see just how people trade into the close and whether the flight for safety starts early this week. We’re already seeing signs of this today with safe havens Gold, yen and the Swiss franc all higher. Equity markets are also a little mixed in a sign that risk appetite remains weak.

EUR/USD – Euro Punches Past 1.20 on Draghi Tapering Comments

USD Hits Lowest Since Start of 2015

The US dollar is on course for its worst week since the end of June, down more than 1.5% at the moment and around 0.5% on the day. Traders have been bearish the dollar for the entire year so far and rather than ease up, this looks to have intensified this week. The US dollar index had stabilised around 92-93, which has repeatedly been a support zone since the start of 2015, but this eventually caved yesterday and more losses have followed.

Source – Thomson Reuters Eikon

Mario Draghi’s failed efforts to stem the euros rise against the dollar on Thursday with dovish remarks – well, as dovish as he could manage without intentionally misleading – has made matters worse for the greenback. With key technical levels now broken in a number of dollar pairs, I struggle to see any reason to be bullish on the currency. While other central banks are becoming less dovish, or in the case of the Bank of Canada more hawkish, the Fed is doing the opposite and the greenback is in freefall.

Dollar’s Capitulation Trade

Safe Haven Gold Breaks $1,350

There is a danger when there’s such a broad market consensus such as this, that the market is primed for a correction, but I don’t think we’re quite there yet. Gold and other commodities are certainly feeling the benefit of the dollar’s decline and with the yellow metal now trading above $1,350 for the first time in over a year, further upside may lie ahead, with the next test coming around $1,375.

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