Fears of escalating military tension between North Korea and the US continues to be the market focus but headlines out Charlottesville over the weekend dominated the wires and while not immediately trade impacting it could present further headwinds for the Republican Party which continues to struggle in the court of public appeal.
On the North Korean front, the market's response continues to be rather a low key. With no escalation of rhetoric over the weekend, we should expect the moderate risk reduction from last week abate reflecting that geopolitical brouhaha can hush as quickly as it started given the overwhelming belief that the risk of a military face off is highly unlikely. However, this is not to say we should expect a risk revival as the Geo jitters could set in again as we head into the joint annual military exercises between South Korea and the US scheduled to start on August 21.
As for global macro risk, Friday’s US CPI unsurprisingly came in on the tepid side, sitting at 1.7 % YoY shifting the December rate hike probability lower, and disappointing the dollar bulls.
The lack of regional geopolitical escalation over the weekend and the tepid US CPI print should play out well for most Asian currencies. And given the dovish Fed narrative, the local basket remains constructive over the medium term, but short term wobbles related to global equity markets will continue to be a concern over the near future. But with the North Korea panic seemingly pausing and with the “ lower for longer” Fed, we could see some tactical buying and pockets of interest across the region despite the omnipresent headline risk.
There is a vast hodge-podge of tier one macro economic data out this week that could distract from the North Korea narrative, but keep in mind the next two weeks are known to be the markets favourite holiday weeks, so liquidity will continue to be a concern ahead September.
The US CPI miss has the EURUSD trading above the key 1.1800 watermark in early APAC as price action remains relatively stable.The disappointing US inflation report has weighed on dollar sentiment as dealers have slightly lowered their expectations of a December US rate hike.
With a pause in the North Korea inspired risk reduction, it allows some breathing room for USDJPY to move higher, but Friday's disappointing US CPI and the never-ending cycle of political backfires in Washington, it should keep any top side run in check.
RBA Governor Lowe’s comments that the Central Bank was “Prepared to intervene in AUD in extreme situations” should keep the Australian Dollar top side momentum in check.And while there's a domestic case for a move lower, the topsy turvy US political landscape keeps the US dollar risk very exposed and owning US dollar still a very unappealing trade.