Global Head of Macro Strategy
Summary: Risk appetite is suffering across the board as the Chinese equity market rally goes in full reverse and the market can’t cobble together a positive narrative elsewhere. Signs of safe-haven seeking in treasuries on the latest equity market slide could be a sign that the Japanese yen is set for a brutal rally.
Chinese equities turned tail and retraced the majority of Monday’s huge gains. Elsewhere, the mood never turned positive as Wall Street suffered a weak session to start the week and the key S&P 500 closed back below its 200-day moving average, an indicator that has been a focus since early this year. The S&P 500 futures are down an additional percent and more overnight on the vicious additional selling taking place out in Asia. The Japanese Topix index is at a critical level as well, staring down the range lows since 2017 as the JPY rallies here.
As we note below in the G10 rundown, the most interesting development for FX, besides China finally revealing its intentions for the RMB, would be whether government bonds are finally finding a safe-haven bid, which could see the JPY rapidly taking the crown as the refuge of choice.
The attempt to build a positive narrative on Italy budget developments and Moody’s not downgrading BTPs all the way to junk is fading fast as the budget showdown continues and shows no signs of letting up. As well, a revolt from Tories is weakening the sense that UK Prime Minister May has a sufficient mandate in Brexit negotiations. EURGBP has poked back above its 200-day moving average and GBPUSD is now within reaching distance of range lows towards 1.2920.
Today we have a number of central bank speakers out all day and we have a flurry of central bank meetings all week, but it feels like this market is battening down the hatches and beginning to trade in the usual risk on/risk off fashion that is likely to persist until the move exhausts itself or other themes can emerge. Speaking of emerging, EM remains stunningly serene at the moment, given the backdrop. Is this due to the false USDCNY stasis and are EM traders insufficiently prepared if CNY volatility spikes?
Chart: USDJPY
USDJPY volatility could be set to spike if safe-haven seeking extends here with equities down and bonds up. Technically, several JPY crosses are looking heavy and the big USDJPY starts to look the same if we poke back below the recent lows, which would already take the pair down through the multi-touch trendline stretching back to earlier this year.
The G-10 rundown
USD – call me a conspiracy theorist, but there is something fishy about the price action in the early European hours in USD pairs, with the USD suddenly lower after late Asia rallies. Don’t know what to do with it – but it could be USDCNY “ceiling” linked.
EUR – the Italy situation now looks very unresolved again after the big BTP rally to start the week. Today will likely see the EU asking Italy to change its budget proposal, which the populists are likely to reject and if neither side will back down, it will be up to the market to decide. Italy spreads are the driver here together with general animal spirits. Watching the 1.1435 area low in EURUSD for further downside risk.
JPY – the JPY could quickly take over the high-beta-to-risk appetite crown if we get an extension of the current combo of strong bonds and weak stocks. Given the massive consensus trade and heavy position in short US treasuries, a further equity sell-off that sees safe haven seeking in US treasuries and moves the US 10-year back below 3.1% or the 30-year back below 3.25% could see a short squeeze that really starts to feed the JPY volatility beast.
GBP – sterling is in a funk again on the latest twists in the Tory rebellion over the idea of a long transition period. But can traders really sustain anything in either direction until we get close to crunch time for Brexit?
CHF – fresh existential risk linked to Italian budget and tumbling BTPs this morning feeding a fresh EURCHF sell-off after the rejection of the attempt to retake 1.1500. Support may come in quickly as long as we don’t transition to new wide Italy-core yield spreads.
AUD – is bouncing from overnight lows, which were not far from the multi-year lows posted earlier this month below 0.7050. Probably need a sense that CNY is going the one way or the other before volatility picks up.
CAD – waiting for Bank of Canada tomorrow and how its spins guidance after the expected hike that will take the rate to a respectable 1.75%. Neither oil nor risk appetite are offering CAD any support here.
NZD – AUDNZD is in a nominal downtrend as long as we remain below 1.0825-50, but we wonder if there is much downside potential, given yield spreads, long-term NZD-overvaluation and the pair trading (mostly) in a 1.03-1.1300 range for five years now.
SEK – Riksbank tomorrow needs to provide the market with clear intent that a December rate hike is on its way to support SEK. Meanwhile, weak risk appetite and EU existential risks are headwinds for the preferred SEK appreciation.
NOK – assuming little prospect that Norges Bank on Thursday offers NOK any positive spin, the latest weak oil prices and sense that the Riksbank is set to hike rates could continue to drive NOKSEK lower within the range and possibly to the 200-day moving average now around 1.0730.
Upcoming Economic Calendar Highlights (all times GMT)
1030 – UK BoE’s Haldane to speak
1330 – US Fed’s Kashkari (non-voter) to speak
1400 – US Oct. Richmond Fed
1400 – Eurozone Oct. Consumer Confidence
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