Talking Points:
- Risk trends were shaken to start the trading week on news of another North Korea launch, though liquidity tempered response
- Bitcoin, Ethereum and other cryptocurrencies were hammered on news China had banned ICOs and South Korea was cracking down
- Liquidity and volatility are due to reverse course on seasonal conditions, while RBA starts a run of central bank decisions
See how retail traders are positioning in the FX majors, indices, gold and oil intraday using the IG speculative positioning data on the DailyFX sentiment page.
The market could have looked very different Monday had US liquidity not been offline. There was a clear heave of risk aversion through the opening session of the week owing to news that North Korea had defied Western nations' call to deescalate their provocative actions by launching another missile. That in turn prompted US leaders to warn that a 'massive' military response could be employed in respone to should they be provoke. The headlines generated the biggest gap higher for the US Dollar - Korean Won exchange rate (USD/KRW) since January. And, the impact wasn't just related to the key players. The swoon in sentiment was felt across global equities, through emerging markets, via Yen crosses and certainly with Gold. The precious metal posted its largest bullish gap since April of 2015 with the combination of a safe haven appeal and the impending run of central bank decisions this week.
The question moving forward is how would the markets recieve a sentiment shift if there was more liquidity and ready volatility to leverage its capacity to move prices. We are likely to soon find out as we pass through the Labor Day holiday in the US that marks the end of the Summer Doldrums and the beginning of more active conditions historically. Historically, the VIX peaks through September and October. Further, September is the only move of the year that has historically averaged out losses. Even if the tide change is moderated by the persistent structural deflation in activity levels, it can certainly be enough to generate enough charge to force some interim breakouts - and perhaps set into motion the broader shift in the financial system. Meanwhile, we have registered plenty of movement in other assets. The croptcurrency market took a dive Monday to extend a drop that began over the weekend. South Korea had announced that it would tighten regulation on ICOs (initial coin offerings), but it was China's decision to fully ban them that dealt a serious blow to the rapid uptake the market had enjoyed. This was not just a Bitcoin plunge. Etherium, Ripple, Litecoin and most other liquid digital currencies felt the pain with some intraday losses registering over 20 percent.
As we return to liquidity moving forward, both fundamental event risk and themes will be on hand to help transmit motivation. A descent into full tilt risk trends is the ultimate evolution for event risk, but it will likely take some provocation to reach that degree of conviction. In the meantime, we have Brexit negotiations offering as much clash as many fatalists had feared. Interestingly, the EU Brexit coordinator Guy Verhofstadt suggested the the next round of negotiations would be pushed back a week to the end of September as he was anticipating an 'intervention' from UK Prime Minister Theresa May. On the monetary policy front, the RBA is due to weigh in on standing. This is the event that carries the least anticipation for surprise (the ECB's and BoC's updates will offer impact one way or the other), but it will nevertheless draw on the context in the wider market to impact risk trends. The standard fare will be pairs like AUD/USD and AUD/JPY, but the real fundamental impact will be registered with EUR/AUD and AUD/NZD. We discuss what this week holds for traders in today's Trading Video.
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