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The #1 FX Event Risk That's Not Syria

The #1 FX Event Risk That's Not Syria

Kathy Lien, Technical Strategist

With growing speculation about a diplomatic solution in Syria, high-beta currencies have been gaining fast, which makes the RBNZ rate decision especially important, even with the US Senate vote hanging in the balance.

Currencies and equities ended Tuesday higher, and two stories in particular dominated the financial headlines: The receding risk of a military strike on Syria, and Apple's new product launches (which were arguably disappointing). The US Senate has postponed its vote on Syria, and President Barack Obama will address the nation this evening with the hope of shoring support for action.

Even so, it seems that the President is softening his tone and growing more amenable to the idea of a diplomatic solution. However, a strike is not completely off the table because there's some resistance to Russia's push to preclude the threat of force in any UN resolution.

Currency traders should watch these ongoing developments carefully because the next 24 to 48 hours of trading will hinge upon these developments. If the US accepts Russia's proposal for Syria to turn over its chemical weapons program for international review, control, and destruction, we could see further gains in high-beta currencies and the continued loss of safe-haven bid for the US dollar (USD).

See related: 7 FX Trade Ideas That Outshine the Rest

With no US economic reports scheduled for release on Wednesday, geopolitical risks should continue to dominate currency flows.

The #1 Event Risk Happening Overnight

The most exciting event risk over the next 24 hours will be the Reserve Bank of New Zealand (RBNZ) rate decision. The RBNZ is not expected to change interest rates, but a strengthening local economy, improving outlooks for both Australia and China (see below), and lending restrictions that could cool the housing market may prompt optimism on the part of New Zealand’s central bank.

The only area of concern is the level of the New Zealand dollar (NZD) and whether the RBNZ still considers it overvalued against the Australian dollar (AUD).

As the Chinese economy continues to stabilize, the commodity dollars have been big beneficiaries, and they extended their gains on Tuesday on hopes that stronger Chinese growth will lead to healthier demand for global exports.

Industrial production in China grew a whopping 10.4% in the month of August, retail sales increased 13.4%, and fixed-income investment rose 20.3%. All three of these releases beat expectations and confirm that China's recovery is gaining momentum after a sluggish first half of the year.

These improvements have also made Australian businesses a bit more confident, according to NAB, whose business confidence index surged to its highest level in more than two years last month. Part of the optimism was also linked to this weekend's Australian elections and the hope that a new government will do a better job of reinvigorating the economy. It will be interesting to see if consumer confidence, which is scheduled for release this evening, also improved.

By Kathy Lien of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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