US: North Korea toys with risk appetite again as Harvey adds to $’s woes - ING

The tail risk of a geopolitical flare-up continues to grow, with news overnight of a North Korean missile being fired over Japan being dubbed an “unprecedented threat” by Japanese PM Shinzo Abe and having a significant impact on the USD, points out the analysis team at ING.

Key Quotes

“Headlines like these continue to highlight the fragile nature of the global risk environment and has inevitably triggered a typical flight-to-safety reaction in currency markets (with JPY & CHF safe-haven flows increasing). The US, however, is dealing with its own domestic crisis – with Hurricane Harvey slowly turning into a Katrina-like national disaster. The knock-on effects suggest dampened 3Q17 US growth that may see the Fed deciding against raising interest rates again in 2017. While this may be too early to call, we do expect this thinking to weigh on the dollar in the near-term – especially as our economists believe that US activity data is unlikely to surprise to the upside, such that it could more than offset any external shock caused by the hurricane in Texas.”

“In terms of data events this week, the standout event will be Friday’s US jobs report; we are looking for somewhat of a goldilocks outcome, with a +160k payrolls print and softer wage growth likely to keep bond yields fairly contained. With both intrinsic and external forces turning negative, it looks like the dollar’s pain is set to continue for now. Risks are for DXY pulling back towards 91.00/50.”