North Korea Continues to Weigh, with the Dollar in Focus

Earlier in the Day:

Risk aversion seeped into the Asian session this morning, with appetite for the safe havens on the rise through the early part of the day, the Dollar falling against the Yen to ¥111.55, with Asian equities following U.S equities into the red this morning.

The losses were relatively muted as the markets keep a close eye on how North Korea and the U.S get through the current crisis, which is certainly more advanced than at any other time this year, the real question being whether the North Korean’s will test the resolve of global leaders with another missile test over Japan or worse yet, another nuclear test.

Macroeconomic data through the Asian session included New Zealand trade data, which disappointed, with the BoJ’s monetary policy meeting minutes also released, commentary providing the markets with nothing new ahead of the snap Election called by Prime Minister Abe.

The softer than expected trade figures out of New Zealand come just ahead of this week’s RBNZ monetary policy decision, with any upbeat sentiment stemming from the better than expected outcome to the weekend election likely to fade as the markets monitor the National Party’s progress in forming a coalition, while also having to consider Thursday’s interest rate decision and tone of the rate statement, which is likely to be on the dovish side.

The Day Ahead:

For the day ahead, stats are on the lighter side through the European session, with data limited to the UK’s mortgage approvals for August, which are unlikely to have a material impact on the Pound and the markets in general and focus remains on monetary policy and, more immediately, rising concerns over North Korea and a possible escalation beyond words.

Gold has been in recovery mode as a result of the pickup in risk aversion, with the Dollar under pressure over North Korea’s view that the U.S has declared war.

Adding to the Dollar’s weakness has been some dovish commentary from FOMC voting members Kashkari and Evans, the only positive having been Kaplan’s positive outlook on inflation, FOMC members speaking through Monday and in the early hours of this morning. The impact from the dovish commentary was softer than usual however, with the FOMC economic projections having only been released last week.

Key to the outlook for the U.S economy remains consumer confidence, with September’s CB Consumer Confidence figures scheduled for release this afternoon. While concerns over North Korea and any noise from Capitol Hill will be the key driver, we can expect the Dollar to find direction off this afternoon’s numbers, with August new home sales also forecasted for release. Based on forecast, the stats are Dollar positive, though there may be some dovish commentary from FOMC voting member Brainard this afternoon to consider, with FED Chair Yellen also scheduled to speak later in the day.

For the EUR, it may be too soon for a post-German election recovery, but we would expect one to be on the cards in the coming weeks, assuming Merkel manages to make smooth progress on forming a tri-party coalition, with ECB President Draghi having maintained his outlook on the Eurozone economy and inflation.

The good news for Draghi and the team will be the softer EUR over the near-term, which could provide the ECB with an optimum time to begin drip feeding the markets with its intentions on monetary policy and the asset purchasing program in particular, though Draghi will need to be quick, a rapid formation of government likely to spur the EUR and re-instil confidence in the Eurozone’s largest economy.

At the time of writing, the Dollar Spot Index was up 0.02% at 92.666, recovering from an intraday low 92.547, with the EUR up just 0.01% at $1.1849, with little to influence the EUR through the day other than market sentiment towards the U.S and North Korea.