background image coins chart

FX Update: Geopolitics and the usual suspects

Forex 5 minutes to read
Picture of John Hardy
John J. Hardy

Chief Macro Strategist

Summary:  No surprise to see the formerly very weak yen coming out on top as the risk party has been interrupted by the sudden spectre of geopolitical conflict with unpredictable outcomes and aggravated headline risk. While the latest injection of volatility is a refreshing change of pace for currency traders, this kind of environment is fraught with danger.


Overnight, US President Trump approved a successful mission in Iraq to take out Iran’s top military leader, a move that is a drastic escalation of the situation after pro-Iran forces recently attacked a US base and after the US embassy was besieged in Baghdad. The US stock market futures were off over 1% from the highs as of this writing on the news and among currencies, the usual suspects, the JPY and CHF, are absorbing safe haven flows. The market positioning is particularly poor around this ugly introduction of geopolitical risk into the market as the recent focus has been on the celebration of generous liquidity provision from global central banks and a general “reach for yield”.

Unless the US-Iran situation de-escalates very quickly from here, unlikely in the nearest term, market participants may find it difficult to navigate this environment as geopolitical risk is the polar opposite of recent market drivers, unless we are to see especially negative macro data over the next cycle. In the bigger picture, the fault-lines across Iraq have never been resolved and the situation there could remain fraught for the foreseeable future, with any involvement from other major regional powers presenting a further risk of escalation.

In macro data yesterday, the final December EU Manufacturing PMI’s yesterday generally notched slightly higher, but we note the exception of the ongoing “sick man of Europe” Italy, where the number plumbed new depths for the cycle at 46.2. The US December ISM Manufacturing is out later today and is expected to bounce slightly, if still printing below 50. Meanwhile, yesterday’s latest US weekly jobless claims prints remains ever so slightly elevated from the previous range, but not sufficiently so to send a clear signal.

The FOMC minutes are up later today and we will focus on the discussion in the minutes on members’ attitude and guidance on the course of balance sheet expansion in 2020 and any concerns about market behavior driven by Fed actions in 2019.

Chart: AUDJPY
With the sudden injection of geopolitical risk as the New Year gets underway in earnest and ahead of a weekend, no less, we have a look at one of the traditional proxies for risk appetite within the G-10 – AUDJPY, which has reversed hard on the events overnight as traders seek safety in safe haven bonds and pull-back on “reach for yield” trades. The damage to the former rally is particularly heavy here, more so than in AUDUSD and the selling could deepen significantly if the market narrative shifts away from the recent celebration of generous G3 central bank liquidity provision. Another figure or so of downside needed to fully break the back of the rising channel.

03_01_2020_JJH_Update_01
Source: Saxo Group

The G-10 rundown

USD – the US dollar coming out on top as geopolitical risk disrupts the “easy Fed” narrative and goes against the recent intensification of USD selling. So far, however, the upside has been rather modest, so USD bulls have much to prove.

EUR – the Euro negatively impacted by the situation – perhaps especially via EURJPY flows and EURUSD must stabilise quickly here around 1.1150 or so to avoid the impression that we are reverting to range-bound purgatory once again.

JPY – no surprise to see the JPY suddenly performing its role as the main proxy for risk-on and risk-off here as both bonds rally, driving lower yields and stocks sell-off, reversing recent drivers for a weaker JPY.

GBP – sterling a bit weaker on the change of focus as safe haven seeking at odds with recent popular long sterling trades like GBPUSD and possibly GBPJPY. 1.3000 is an important technical and psychological level for cable.

CHF – the franc is absorbing safe haven flows and the SNB is likely leaning against the price action here now that EURCHF is pushing on the cycle lows this morning.

AUD – the Aussie suffering on some consolidation after the run-up into year-end and especially on the sudden narrative shift that tears the focus away from celebrating the US-China trade deal likely set to be signed later this month. The AUDUSD rally remains intact if the pair steers clear from closing below the 0.6925-00 area.

CAD – the loonie celebrating the big boost in oil prices – particularly as demand for Canadian crude could accelerate if the risk of supply shocks is concentrated in the Middle East. A big technical break here as 1.3000 has fallen in USDCAD as well – the first break of that level since 2018.

NZD – the kiwi not liking the sudden change of focus away from the US-China trade deal and hopes for a global rebound. The NZDUSD rally is so extended that it will take tremendous further downside (far below 0.6600 to start) to demoralize the bulls.

SEK – the krona not taking a liking to relatively weak EU PMI’s yesterday, but more so the sudden risk-off tone and concerns for global growth that come with geopolitical risk-driven higher oil prices. NOKSEK perhaps a bit of a theme on oil prices as well, but SEK bulls in business in EURSEK as long as we remain below 10.60-ish.

NOK – the NOK absorbing inflows as oil prices spike, though with risk appetite negatively impacted, the reaction is muted. Couldn’t be better timing for Norway as the country’s largest new oil field in a long time has come on line in recent months.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0930 – UK Dec. Construction PMI
  • 0930 – UK Nov. Mortgage Approvals
  • 1300 – Germany Dec. Flash CPI
  • 1500 – US Dec. ISM Manufacturing Survey
  • 1900 – US FOMC Minutes
  • 0145 – China Dec. Caixin Services PMI

Quarterly Outlook

01 /

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.