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View from London: Euro/Yen Among Currency Trading Puzzles

08/09/2017 2:59 am EST


Robert Savage

Partner & CEO, CCTrack Solutions

The break of 110 in USD/JPY leaves the 130 break looking more interesting in the cross and suggests 127.50 is the next big level to watch – an indicator of the path chose by investors, writes Bob Savage, CEO of Track Research in Wednesday commentary from London.

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The war of words from US President Trump’s vow of “fire and fury” if North Korea made new threats led to Kim Jong Un to say he was considering a strike on the U.S. island of Guam. The bluff of war is being called.

This isn’t just about a day of risk-off trading as about the path choices for investors in the weeks ahead. Perhaps we are bitcoin traders now facing a fork in the road – cash or futures.

Or perhaps we are more logically in a fight or flight mode.

Much of the summer trading time has been spent by analysts breaking down the market into bulls and bears with the “overvaluation” arguments becoming intense despite great 2Q earnings for equities, despite no clear inflation signals for bonds and despite dwindling inventories for commodities.

Now is the time for those that have learned the lessons of the last 7-years – buy-every-dip – to consider whether this time is different.

War with the US/North Korea has become a distinct possibility. Safe-havens are in vogue with moves in Japanese yen (JPY/USD), Swiss franc (CHF/USD) and Gold being notable.

This isn’t a black swan but a known unknown and something that has been brewing since the unsteady armistice from July 27, 1953. Eisenhower forced the deal with the Chinese and North Koreans by threatening nuclear war leading to the present DMZ and new 38th parallel South Korean border.

So, the news flows were mostly ignored other than the verbal sparring overnight. This leaves some room to be wary as U.S. markets await the next response from Trump. The U.S. data from JOLTs was strong enough to support the USD but the fear factors now mute that story.

The weaker China CPI and flat PPI suggest no inflation is breeding there and the better French and Italian Manufacturing just highlight the Goldilocks world except for the geopolitical noise.

So, we are caught in a risk-off mood being called either a bluff or an opportunity – with no clear indication of which as many seem frozen in the heat of summer waiting for more information. The chart that seems less clear is euro/Japanese yen (EUR/JPY), which captures the broad uptick in EUR over the last 3 months driving on better growth and ECB taper talk against the JPY which has been modestly trying to trade in 110-115 envelope with BOJ encouragement.

The break of 110 in USD/JPY leaves the 130 break looking more interesting in the cross and suggests 127.50 is the next big level to watch – that may be the best indicator of the path chose by investors in the days ahead.

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