Risk sentiment strong despite trade war, rising yields Risk sentiment strong despite trade war, rising yields Risk sentiment strong despite trade war, rising yields

Risk sentiment strong despite trade war, rising yields

Forex 8 minutes to read
Picture of John Hardy
John Hardy

Head of FX Strategy

Summary:  Markets have just seen Washington and then Beijing deploy the largest round of tariffs yet in their ongoing trade scuffle, but risk sentiment remains resilient. One possible factor there could be Beijing's disavowal of using CNY devaluation as a policy plank.

Two key developments driving market action at the moment for the major currencies:

Rising bond yields: rising sovereign bond yields around the world are driving a weaker USD and a weaker JPY due to the ability of risk sentiment to rally at the same time. Yes, in many cases the US rate rises are a bit sharper than elsewhere, but the sense of some convergence nonetheless (core EU yields have risen nearly as fast as US yields) is helping other currencies to keep pace with the greenback and even rally sharply. In Japan’s case, the more or less fixed yields out to 10 years mean that the currency absorbs the impact of rate rises elsewhere since JGB’s theoretically can’t. An until the Bank of Japan sends the signal that it will turn yields loose to move of their own accord, and/or until the US Tweeter-in-Chief turns his attention to BoJ policy and JPY weakness as essentially a pillar of Japanese economic policy, the JPY will likely weaken in tact with the rise in yields. Overnight, the Bank of Japan failed to show signs of shifting on policy once again.

Risk-on despite trade war headlines: the ability of markets to put on a risk-on show just as the US and China have announced their most aggressive trade tariff announcements looks like a classic “sell the fact” moment, as risk has rallied across the board despite this latest very aggressive exchange between the US. Everyone is searching for answers on how this can be, and not sure I have much to add to the noise other than agreeing that China’s electing to go with a 5-10% level on its latest round of tariffs rather than 10% across the board suggests a measure of friendliness in its stance. As well, fresh promises not to use CNY devaluation as a policy provided a fillip (which makes sense as China’s external balances show imports rising far more rapidly than exports in recent years and especially the energy import bill would rise perilously if China chose the devaluation route).

Today, look out for the UK CPI up this morning and then how the Brazilian real and other EM currencies react to today’s rate announcement from Brazil’s central bank. Brazil’s currency has been under tremendous pressure, but the central bank has failed to signal any intent to hike rates. The first round of the country's chaotic presidential election is up on October 7.


The Aussie is working higher on the ebullience in Asian markets despite the latest exchange of tariff threats from the US. China’s avowal to avoid CNY devaluation and a chunky rally in the major Australian mining stocks are a boost for the Aussie, and heavy short speculative positioning could drive a further squeeze higher. Note that we are rapidly running out of room in the descending channel, a break of which could open up for 0.7500 or higher, even if we remain in a secular bear market.
Source: Saxo Bank
The G-10 rundown

USD – in cycles past we would have looked for a breakout in US long yields to serve as a positive USD catalyst, but as long as yields elsewhere are managing to track the US and risk appetite avoids destabilisation, the USD could instead underperform for now.

EUR – the euro a bit of a laggard here as the focus is more on currencies that tend to be more high beta to risk appetite, but still constructive on upside potential as long as EU yields are participating in the global sell-off in bonds.

JPY – as described above, as long as the BoJ keeps its fixed rate – “YCC” regime, the yen will absorb global yield rises. Still, the market could get testy if the BoJ shows the least crack in its resolve as 10-year JGB yields approach the 15 bps level.

GBP – sterling pulling away from fresh highs this morning ahead of the CPI data. At these levels, more notable moves more likely to be driven by Brexit developments, whether positive or negative.

CHF – makes sense to finally see CHF weakening as risk sentiment improves even amid rising yields– a decent rally here in EURCHF and there may be more to come – the next focus is the upside pivot just ahead of 1.1350.

AUD – an Aussie short squeeze has been set in motion – how far will it shoot higher is the next question. There isn’t much more room within the descending channel in AUDUSD before the upside bound is impacted – see above, while the reversal in AUDJPY is already rather profound.

CAD – the loonie working into the last layers of support, with the close this week looking pivot for whether a more profound sell-off into 1.2500 can unfold from here. Canadian CPI print on Friday a key even risk for whether Canadian short rates can tighten relative to their US counterparts.

NZD – NZDUSD in danger of a squeeze if the action remains above 0.6600 on the other side of this evening’s NZ GDP report and the USD is on its back foot. Given the recover in the Aussie, would have expected AUD outperformance – but let’s have a look at the NZ data tonight.

SEK – Fibo retracement levels for EURSEK incoming below 10.35, but not seeing much to corral this move until the 10.20-25 area comes into view. The 200-day moving average is now above 10.20 and was last crossed above last October.

NOK – Key test for NOK over the Norges Bank tomorrow and the bank’s guidance. We’re constructive on NOK given the backdrop and if the Norges Bank guidance supports the recent move in Norway’s 2-year rates to the highest since late 2014.

Upcoming Economic Calendar Highlights (all times GMT)

• 0830 – UK Aug. CPI
• 1230 – US Q2 Current Account  Balance
• 1230 – US Aug. Housing Starts / Building Permits
• 1300 – ECB’s Draghi to Speak
• 1430 – US Weekly Crude Oil/Product Inventories
• 2100 – Brazil Selic Rate
• 2245 – New Zealand Q2 GDP

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 (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/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.