COT Update: IMM currency futures COT Update: IMM currency futures COT Update: IMM currency futures

FX Update: How will FX react to the realization that stagflation has arrived?

Forex 5 minutes to read
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  It is easy for commodity currencies to advance strongly when only the inflationary component of stagflation is in play, but what happens across FX if risk sentiment starts to consider the outlook for sharply weaker growth, especially if yields rise further? Key tests lie ahead on that account for the most yield-sensitive currency the Japanese yen, as well as classically pro-cyclical commodity currencies.

FX Trading focus: Stagflation is here: once realized, how does that impact recent developments?

There was no add-on CNH strength after yesterday’s remarkable rally in the currency that nearly took it a full percent stronger versus the US dollar in the strongest sell-off in the USDCNH pair in a single day in nearly a year. In this morning’s Saxo Market Call podcast, our Steen Jakobsen linked this move with rising commodity prices in China as well as policymakers there moving in a successful rhetorical intervention against the latest spike in domestic coal prices. The podcast outlines the stagflationary risks facing the economy, underlined this morning by incredible Germany PPI prints showing a record +.23% month-on-month increase and +14.2% year-on-year.

Steen believes that it is only a matter of time until yields lift further and all along the curve as sustained inflation levels will handcuff central banks on providing further liquidity support. If so, rising long yields would prove a very interesting test for both the Japanese yen and risk sentiment generally as the highest-flying portions of the equity market are extremely interest rate sensitive. Yesterday, the US 10-year treasury yield benchmark closed at a new local high and followed through a bit higher still overnight, taking USDJPY to a new high since early 2017 above the key 114.50 area. But both USDJPY and US treasury yields eased back lower in early European trading. The 114.50-115.00 area is monumentally important for that pair. The US Treasury will auction 20-year treasury notes later today.

If the risk of a sustained stagflation is recognized by this market, we’ll also have an interesting test  of other prominent currency market developments of late, namely the strong outperformance of commodity-linked currencies. That outperformance is a no-brainer when risk sentiment is on full tilt to the upside as we have seen over the last week, but how can the latter be sustained if the market starts to price in a higher cost of capital as well as weaker growth and weaker earnings growth risks? As discussed in the look at the AUDUSD chart below, that pair will be interesting to watch if the backdrop shifts gears in coming days/weeks.

As noted above, interesting to see how any realization of stagflationary risks affects key currencies that sit astride conflicting themes that such a realization brings. The risk of ever higher commodities prices and an eventual repricing of the forward rate curve as the RBA trips over its forward guidance by early next year could prove very supportive for the Australian dollar, while the risk of cratering risk sentiment and forward concerns for the real growth outlook could add a negative drag. For now, AUDUSD is knocking at the door on key resistance and has poked above the local pivot high. I would like a couple of ugly days of equity markets selling off with AUDUSD simply taking that development in stride and not selling off before believing that we are headed for a major push higher back into the zone above 0.7600. But regardless, the technical lay of the land is such that the 0.7500-0-7600 zone looks to be the key for establishing whether the chart remains structurally bearish or is neutralized by a rally back into the upper zone.

Source: Saxo Group

Hungary added another odd 15 bp hike yesterday, taking the rate to 1.80%. After surprising markets at the previous meeting with a mere 15 basis point rate hike (versus 30 bps expected) that saw the Hungarian forint weakening sharply, the Hungarian central bank met expectations and once again hiked by this small increment with the same result – a weaker HUF weaker, as EURHUF traded above resistance since earlier this year around 362. The central bank chief Virag said in the wake of the decision that “the fight against inflation is similar to long-distance running, not to a sprint”, but it looks like the central bank will need to hike more and more quickly to slow the HUF’s descent. The all-time highs in EURHUF are just ahead of 370, posted just after the pandemic outbreak last year. In the background, the escalating confrontation between Poland and the EU over rule-of-law issues and the disbursement of EU Recovery Plan funds looks critical. Could the EU be soft-pedaling its confrontation with Hungary for now until it gets a look at the election results in the spring as the united opposition in Hungary to Orban’s government is polling well and could end his reign. The new leader of that opposition has voiced hopes for stronger ties with the EU.

Table: FX Board of G10 and CNH trend evolution and strength
The JPY reading has reached the remarkable -10 level, a rarified reading, as the US dollar teeters here and likely needing a punch in the gut to risk sentiment to stay resilient. Elsewhere, note the staggering momentum change over the last week in the NZD as the market prices in the RBNZ on the warpath on rate hikes.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs
Note the AUDCAD rally sufficiently impressive to flip the trend to positive, while EURUSD isn’t far away from doing the same, but chart-wise needing to vault above 1.1700.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 0700 – ECB's Villeroy to speak
  • 0720 – ECB's Elderson to speak
  • 1230 – Canada Sep. Teranet/National Bank Home Price Index
  • 1230 – Canada Sep. CPI
  • 1340 – ECB's Holzmann to speak
  • 1500 – ECB's Villeroy to speak
  • 1700 – US Fed’s Quarles (voter) to speak
  • 1800 – US Fed Beige Book
  • 0030 – Australia Q3 NAB Business Confidence

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • 350x200 peter

    Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 350x200 althea

    Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • 350x200 peter

    Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • 350x200 charu (1)

    FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • 350x200 ole

    Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article


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 (
Full disclaimer (
Full disclaimer (

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

Contact Saxo

Select region


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.