Oil, risk appetite collapse supercharged yen Oil, risk appetite collapse supercharged yen Oil, risk appetite collapse supercharged yen

Oil, risk appetite collapse supercharged yen

Forex 6 minutes to read
Picture of John Hardy
John J. Hardy

Chief Macro Strategist

Summary:  The bottom has dropped out of JPY crosses on the triple-whammy of weak risk appetite, safe-haven seeking in sovereign bonds and a steep drop in crude oil prices. The USD is largely adrift during this run, potentially held back by speculative positioning.


To the yen-supportive “double whammy” we mentioned last week, we can add a third whammy: a collapse in crude oil prices that further supports the Japanese currency, as Japan relies on imports for most of its energy needs. JPY crosses were all sharply lower to end last week and the selling has continued to start the week in Monday’s Asian session after the weekend’s developments.

As for the US dollar, its role as a safe haven has not played prominently here, with the big dollar perhaps held back by speculative positioning (or, finally, despite the prior lack of response, the aggressive acceleration of anticipated Federal Reserve rate cuts is now providing some drag on the USD after failing to do so previously. Thursday and Friday saw an entire, further 25 basis point cut priced in by the December Federal Open Market Committee meeting.

At the weekend, China formulated a position statement on the trade policy showdown with the US, saying the latter was to blame for the breakdown in negotiations and repeating the three points originally brought by Liu He in Washington when the talks failed last month. Still, some saw the Chinese position as leaving the door open for negotiation, perhaps beginning already later this week as trade officials will meet in preparation for the G20 summit later. While some semblance of diplomacy was in evidence, China continues to show a hard stance as it promised to draw up a blacklist of “unreliable” foreign entities – arguably a tit-for-tat response to the US placing Huawei on its so-called Entity List – and even announced an investigation of FedEx practices.

Overnight, the bellwether that is South Korea reported a weakening in its May Nikkei Manufacturing PMI, which dropped to 48.4 after stabilizing slightly above 50 in April.

Looking at the week ahead, the market will be highly sensitive to trade war-linked headlines, now that volatility has lurched back higher. So far, the bulk of the market drama has been in US Treasuries, where yields are in a freefall and now below 2.00% all the way out to beyond five years (and not much above that level out to 10 years, as the yield curve has hardly steepened, even as traders fall all over themselves to price in rising odds of Fed rate cuts).

In equities, selling intensified last week but the VIX is still below 20, and in currencies, nearly all of the volatility has only shown up in JPY crosses and select EM currencies. 

Besides the risk-on, risk-off swings on headlines, we also have an important Fed conference this week, kicked off tomorrow with a speech from Fed chair Powell. It is titled "Monetary Policy Strategy, Tools, and Communication Practices". This could be the Fed’s attempt to provide a foundation for a more dovish policy mix to encourage inflation to run above 2.0% for a time.

The bond market is saying too little, too late right now and the still flat curve suggest that the Fed has yet to impress the market with its dovishness thus far. The overriding question is whether the Fed even has the tools to do anything about inflation, or whether only the US treasury and fiscal levers can bring a sustained inflationary impulse, with the Fed merely as a non-independent auxiliary.

Chart: AUDUSD

An interesting test for the Aussie tonight as the Reserve Bank of Australia has thoroughly flagged that it will cut rates at tonight’s meeting, but suspense lingers on whether this will be a one-off or one in a series of two or more hikes. The market will pore over the statement for clues on guidance. Our suspicion is that two is an absolute minimum for the cycle and more likely four eventually, with QE or similar necessary if trade war risks deepen.

The AUD is somewhat resilient here – is this a product of position squaring as speculators have been heavily short the currency? Hard to see upside here, outside of a minor squeeze on a less dovish than expected guidance. The 0.7000 area is the key resistance zone for bears.
AUDUSD
Source: Saxo Bank
The G10 rundown

USD – the greenback seeing little in the way of safe-haven flows, but USD liquidity will constantly come back to haunt if credit conditions are tightening globally on concern for the outlook.

EUR – the Euro seeing a modest rally off the lows against the US dollar, but not showing strength generally – the European Central Bank meeting will show whether Draghi agrees that the ECB has an empty toolbox.

JPY – the yen wrecking ball is swinging with full force and will likely continue to do so as long as risk sentiment, oil and yields continue due south. Expect Kuroda to rattle the policy cage sooner rather than later – real policy drama not likely until after G20 at the end of this month, however.

GBP – a bit of selling exhaustion in evidence after EURGBP failed to hold the new high on Friday and momentum could roll over here for a bout of consolidation at least until we’re a bit more clued in on the next steps for Brexit.

CHF – the bottom giving way in EURCHF here – has the market (including us) been complacent on SNB intervention? Some added energy, perhaps from the break unfolding as USDCHF breaks below parity.

AUD – a bit of resilience in the  crosses ahead of tonight’s RBA cut – profit taking on crowded specs? An ugly correction in iron ore prices in China is eroding further fundamental support here.

CAD – the loonie rather stable despite the drama in oil markets and last week’s dovish Bank of Canada turn. Have USDCAD traders surrendered all hope of volatility?

NZD – AUDNZD tried to piece together a rally but held back by the 200-day moving average just above 1.0600 – key test tonight for relative strength over the RBA decision as RBNZ likely to more or less tracks the RBA’s moves.

SEK – EURSEK has been taken back to the 9.60-65 pivot area, surprisingly in the context of very weak sentiment (was the oil collapse a driver via NOKSEK late last week?). A significant break through this level would suggest a top in place – stay tuned. This morning saw a strong Swedish PMI survey.

NOK – the carnage in oil markets is keeping NOK sidelined, really a sign of strength that EURNOK hasn’t rallied more notably. Norwegian short  rates finally coming under some pressure, waking up to global trends.

Upcoming Economic Calendar Highlights (all times GMT)


13:45 – US Markit May Final Manufacturing PMI
14:00 – US May ISM Manufacturing
17:25 – US Fed’s Bullard (FOMC Voter) to Speak
22:45 – New Zealand Q1 Terms of Trade Index
01:30 – Australia Apr. Retail Sales
04:30 – Australia RBA Cash Target

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

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.