Daily Market Brief 18 Apr 2017

Dollar regains poise as Traders Return

April 18th: Highlights

  • North Korea concerns continue
  • French election driving Euro
  • Sterling in doldrums as Brexit negotiations continue

North Korea promises more tests

In a move designed to defy the U.S., North Korea promised to step up its missile testing programme as it strives to become a nuclear power.

Global concerns that Presidents Kim and Trump are likely to step up from rhetoric to a more tangible response sent the JPY to new five month highs. The Yen is the “go-to” currency in times of global stress or uncertainty. Japan’s low inflation economy protects the value of investments.

The JPY reached a high of 108.87 just shy of major support resistance at 108.80 before regaining the 109 level. As tensions are ratcheted up further volatility can be expected.

Despite the U.S. Treasury backing away from naming the “Big Four” Asian economies as currency manipulators, todays bilateral talks on trade between the U.S. and Japan are providing fresh volatility.

China, Japan, South Korea and Taiwan run huge trade surpluses with America. President Trump has said that this proves how badly the U.S. has been treated in previous trade agreements.

Vice-President Steve Pence, in south Korea, commented that the free-trade agreement between Washington and Seoul will be re-negotiated.

Treasury Secretary putting on his banker’s hat, forgetting politics for a while, disagreed with the President briefly stating that he understood short-term dollar strength given the economic cycle. He quickly regained his political credentials saying that longer term more needed to be done to ensure equilibrium in currency markets.

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French election cast shadow over Euro

The French Presidential Election has entered its “blackout period” when no further polls can be published and candidates are banned from campaign speeches. This is the “time for reflection. Given that up to 30% of the population have not decided their allegiance it should be time well spent.

Following a relatively quiet Easter Holiday period, the Euro is set to become more volatile as traders position themselves for Sunday night’s result. Support is seen at 1.0550 with longer term resistance above 1.0800. Further trading within this range is likely until the end of the week.

Of course, all Sunday’s vote will do is determine the candidates moving forward to the run-off, on May 7th. Electoral experts will pore over the results, the most important of which will be the gap, if any, between the two moving forward. One of the two is likely to be Marine le Pen who has wrestled control of the Front Nationale from her father and embarked on a journey to make the formerly racist, unelectable party, more acceptable to voters. She platform is anti-EU and anti Euro. If elected she will take France out of the single currency and allow a Frexit referendum.

Should Ms. Le Pen receive a significant (5%+) lead over her nearest rival, Emmanuel Macron the Euro is likely to react in a similar manner to what happened to Sterling following the Brexit vote.

Any other result is likely to provide a “relief rally” for the single currency although there is, so far, very little evidence of traders taking positions based upon the possible outcome.

Pound steady as Brexit negotiations go private

No news is good news. That old saying could be used to describe the performance of sterling since the triggering of Article 50 on March 29th. We assume that negotiations have reached the “boring” stage where the nitty gritty of the divorce is being negotiated out of the public eye.

The pound has been reactive and traders have been happy to allow it to drift, driven by events in France and Asia. Coinciding with this period of calm, the Bank of England Monetary Policy Committee is also taking a break, not meeting in April so the relevance of data releases is also diluted.

May’s meeting to be held on Thursday 11th, will have access to a greater supply of data and will be more able to make an “informed decision” about the economy. However, for now, the headwinds have lapsed slightly and the pound has entered calmer waters trading a narrow range between 1.2600 and 1.2360 against the dollar. Against the Euro, the pound has been strengthening since March 29 reaching a high of 0.8456 just above strong Euro support at 0.8410, a technical triple bottom.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”