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The FX Trader: Currencies can only ignore risk off for so long
John J. Hardy
Global Head of Macro Strategy
Summary: Weak risk sentiment continues to show little transmission into FX, but currency traders can only hold out for so long if this backdrop continues, with the yen likely at the center of any potential volatility expansion.
What to know: quick bullets
- FX attempting once again to ignore the weakness in risky assets, seemingly led overnight by a melt-down in Bitcoin overnight, but Japanese stocks have also suffered an ugly break even without a JPY rally, and US equity market futures are in a funk after a weak close yesterday. It’s the first time a 1-month low in US equities is in play since all the way back in February. In FX, the only reaction is modest weakness in pro-cyclical currencies from AUD to NOK and SEK, with the US dollar slightly mixed after a bit of strength yesterday. Precious metal weakness, if it continues here, may continue to weigh on AUD, with AUDUSD nearing an important support zone into 0.6450.
- The JPY traded at first weaker overnight as long JGB yields rose to new post-GFC highs as the market frets the size of the incoming Takaichi fiscal package, which she said overnight would be “somewhat larger”. The fiscal package is set for unveiling on Friday. The JPY set minor new lows versus the USD as USDJPY peaked out at 155.38 after breaking 155.00 in late US trading yesterday, while EURJPY managed to pull to a new record high, posting a 180.02 high before easing back.
- US treasuries are suddenly a safe haven overnight after a mixed session yesterday – this is JPY supportive at the margin if it sticks, unless the narrative is that this is also a safe haven bid from Japanese investors. Stay tuned – the ally in USDJPY is unconvincing for now.
Chart focus: USDJPY
USDJPY has rallied above 155.00 – doing so with some momentum for a brief minute on the break itself in late yesterday in the US, but not seeing any follow through overnight, even with concerns that Friday’s fiscal package announcement from Takaichi will worsen the deficit outlook and weigh further on the JGB market, where long yields are setting new post-GFC highs. The slope of the rally has been rather shallow and one can argue that the pair is creating in an ascending wedge formation. These formations classically either resolve into a steep sell-off, or a de-stabilizing melt-up that is likewise reversed.
Technical and other observations for key pairs.
- Dollar Index – the US dollar is like neutral ether – no impulsiveness in broad terms – waiting for a rally above 100.00 or slide below 99.00 for further steps.
- EURUSD – see Dollar Index above – certainly not the focus for now – waiting for what price action looks like above 1.1670 or below 1.1550.
- JPY pairs – the JPY at the assumed epi-center of any volatility breakout – especially if a steep sell-of bar develops on its own accord in USDJPY without official intervention (which is likely if the rally falters). Alternatively, if the fiscal package uncorks a steep JPY sell-off, the rally in JPY pairs could run into official intervention.
- GBPUSD and EURGBP – if global risk-off funk extends, sterling is usually poorly positioned.
- AUDUSD and AUD – global risk-off, also hitting metals now, is weighing on AUD and the important 0.6450 area.
Next steps
The September US jobs report/nonfarm payrolls change will now apparently be released on Thursday, but will feel like ancient history as we need to know the current dynamics after big October layoffs announced. Today’s weekly ADP payrolls release (for 4-week average private payrolls change through November 1) feels more important. December rate cut odds have dropped to 44%, which seems low.
But really, the focus will be on whether risk sentiment can stabilize and on the JPY dynamics depending on the direction in US yields and sentiment on the fiscal and JGB dynamics in Japan around the announcement of the fiscal package on Friday.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The JPY remains weak but can’t help it has two-way potential as noted above. Note the AUD momentum cratering on risk-off and metals weakness, as well as CHF safe haven status and indeterminate EUR- and USD-trend readings. SEK and NOK tilting lower again yesterday and overnight on wobbly risk sentiment.
Table: NEW FX Board Trend Scoreboard for individual pairs. Not much worth noting except that weak risk sentiment is seeing underperformance of pro-cyclical G10 smalls versus the EUR as EURAUD and others are trying to establish fresh up-trends, while EURSEK flip-flops within the range (remember that the dark shading suggests the trend flips if at current prices on the close).
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The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options..