Underestimation can be costly. This once again was proved by the events around North Korea. Recently, the markets have been too calm and preferred not to pay attention to developments in Asia. But no sooner did the Washington Post refer to sources in American intelligence to publish material about Pyongyang's miniature nuclear warheads, and Donald Trump - answer that the States would react with such fire and fury that the world had never seen before, than traders rushed to safe haven assets. North Korea was quick on the draw saying that it is considering the possibility of a military strike against Guam, and now the whole world is sitting on a volcano. No wonder the yen, franc, and gold are growing.

 

The US dollar showed mixed dynamics against G10 currencies, strengthening against performing assets and the euro against the backdrop of worsening geopolitical risks, growing VIX fear index, correction of world stock indices and strong statistics on the US labor market. The number of available jobs in the United States reached a record level of 6.163 million. Employers remain hungry for new employees, which signals a strong health of the labor market and the US economy as a whole. In June, they added 417,000 jobs in the private sector and 44,000 in the public sector.

 

Dynamics of the number of available jobs in the US

Forex is sitting on a volcano    

Source: Bloomberg.

 

The euro went for a small correction against the background of profit-taking by hedge funds on long positions. Their net long positions in the futures market reached a maximum mark for the last 6 years, and some speculators decided to withdraw from them amid fears about potential verbal interventions by the ECB. The 12% rally of EUR/USD worsens the financial conditions in the euro area, threatens to default on inflation forecasts, and creates problems for exporters and the European stock market. According to Morgan Stanley research, 52% of the income of the companies of the Old World are connected with external markets, while the growth of the euro rate by 10% reduces profit by 8% provided that it is not hedged.

 

Dynamics of Euro Stoxx and EUR/USD

Forex is sitting on a volcano

Source: Bloomberg.

 

At the same time, the medium- and long-term outlook for the single European currency remains optimistic. Along with hedge funds and asset managers, central banks are increasingly appearing as its fans. In 2014-2015, they reduced the share of the euro in gold and foreign exchange reserves, and now, in the face of aggravation of political risks in the US, they certainly prefer to rebalance their own portfolios. Moreover, macroeconomic statistics allow them to do this. So the growth of Germany's foreign trade surplus in June from €22 billion to €22.3 billion became the next brick in the wall of a strong second quarter. According to forecasts of Bloomberg experts, German GDP grew by an impressive 0.8% q/q.

 

Correction of EUR/USD in the direction of 1.1625-1.165 and 1.15-1.153 will provoke a new wave of purchases of the single European currency, while reaching the above-mentioned support levels without strong statistics on US inflation will be incredibly difficult.

Forex is sitting on a volcano

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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