Head of FX Strategy
Summary: USDJPY swooned to a pivotal level yesterday without yes breaking as the JPY thrived on weak risk sentiment and tumbling commodities prices, together with a fresh plunge in safe-haven bond yields. Elsewhere EURUSD continues to tease in the 1.1765-1.1800 area with no resolution. The wave of risk-off yesterday has sent the usual suspects lower, with somewhat little follow-through today as sentiment has stabilized slightly.
FX Trading focus: Still risk of a climactic move, one that brings with it fresh opportunities
Yesterday’s wave of risk-off took the USD higher and the JPY higher still as US treasuries spiked sharply, taking yields to their lowest for the cycle, with the 10-year benchmark a chunky 10 basis points lower and closing south of 1.20% and headed lower still in today’s trade. Intraday yesterday, the JPY was outgunning the USD significantly and sent USDJPY to a key support level as noted in the chart below, while the EURUSD can’t find inspiration for a directional move. The smaller DM and EM currencies were generally lower against the greenback, with CAD and NOK particularly weak on a stunning five dollar per barrel retreat in oil prices.
The US equity market managed a bounce just ahead of the close of the session yesterday (we note that the bounce unfolded at a pivotal level for the S&P 500 on this morning’s Saxo Market Call podcast), one that followed through to a degree into Asian and European hours today, but that move has faded somewhat and long US yields are punching down to new lows for the cycle, as are EU sovereign yields as the German Bund yield screams lower today to under -40 bps. As noted on the podcast, this move may not yet have exhausted itself and could even deepen viciously as those that have positioned themselves with heavily leveraged longs for this cycle may find liquidity is insufficient for an orderly reduction of positions. This will likely also present significant opportunities for establishing trades if volatility spikes sufficiently to bring the inevitable next easing move from central banks and governments. In that regard, positioning should be modest for an extension of this trend (also as trading ranges are expanding) with some powder reserved for when/if things get disorderly.
Chart: USDJPY
The JPY has edged out the US dollar since early yesterday, with a solid move lower yesterday that was halted at the key support/pivot level we have noted previously – namely, the 61.8% retracement of the rally wave from the April lows of 107.50 near 109.10, which is also near the lower edge of the Ichimoku cloud. The JPY is finding support nearly across the board from the plunge in oil prices (Japan imports all of its oil although prices for LNG are soaring due to a Northeast Asian heat-wave), widening EM credit spreads and sharply lower safe haven yields. This 109.00 area in USDJPY is critical for whether the JPY continues to outperform the greenback here. A reversal would likely need a sharp rally and close above 110.00 and might coincide with a general reversal of the risk-off backdrop, or at least with a reversal in treasury yields back higher if that is not the same thing.
Table: FX Board of G10 and CNH trend evolution and strength
Strong trending readings have gotten stronger as the JPY was the strongest performer yesterday, followed by the USD and CHF, and the smaller DC currencies tumbled further, particularly oil-linked currencies NOK and CAD, but also NZD losing steam rapidly (note NZDUSD trading to major lows today).
Table: FX Board Trend Scoreboard for individual pairs
Note here that gold managed to avoid a flip to the negative side as a bid came in after the price edged below 1,800 – the outlook needs to shift one way or another there as it is stuck in a narrow range. Note that EURGBP flipped to a positive trend yesterday as well, while GBPUSD has punched down through its 200-day moving average and is now about a percent from the huge 1.3500 area.
Upcoming Economic Calendar Highlights (all times GMT)
AI: The good, the bad, and the bubble
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Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
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As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
