FX Update: JPY strength continues under the radar

Forex 5 minutes to read

John Hardy

Head of FX Strategy

Summary:  While many exchange rates remain clearly driven by buoyant risk appetite, the Japanese yen is quietly strong relative to its normal behavior with the backdrop of strong risk sentiment in global equities, and to a degree in EM in recent days. We continue to watch EURJPY for signs of a more profound breakdown.


Yesterday I penned an article looking at initial thoughts on the upcoming US Presidential Elections and reasonably strong conviction that Trump will lose, and what a Biden presidency would likely mean for asset markets.

Late yesterday, Fitch downgraded Italian debt to BBB-, just a notch above junk, but this only merited some seven basis points of spread widening in early trading today in Europe as we all know that the ECB is all about crushing the spreads until EU and Italian politicians decide that the EMU is to be explicitly reconsidered for Italy. The ECB has made the mistake of putting an amount on its intended asset purchases, something the Fed has abandoned in the case of treasuries and MBS, and the ECB would do well this Thursday to at least dramatically lift the amounts or just come out with the “however much is necessary” rhetoric around sovereign purchases. But even there, the ECB will eventually be treading dangerously deep into political territory once purchases go beyond a certain size. The next key data for the existential angle on the EMU and the euro is the May 6 video meeting of EU leaders.

The Swedish krona jumped higher in the wake of yesterday’s RIksbank meeting as Sweden’s central bank reduced its forecast horizon for policy and kept it at zero rather than shifting to negative as many might have feared, with a minority of observers even looking for a rate cut at yesterday’s meeting. The statement didn’t rule out negative rates in principle. EURSEK slammed lower after the recent bottled-up price action and stopped right on the critical support of the 200-day moving average just below 10.70, a pivotal level to watch from here.

The Hungarian forint was marginally weaker yesterday after the Hungarian central bank announced the start of QE in Hungary – a country that in the past I would have argued was far from able mobilize unconventional monetary policy like large scale asset purchases without collapsing the currency. But with unconventional policy turning conventional, the move looks less shocking. Still, with Hungarian real interest rates having gone steeply negative before the Covid19 outbreak, we will be watching inflation closely for signs that the government is overheating the money printing presses. AS well, we are concerned that the new ECB budgets (the seven year MFF) will leave Hungary out on in the cold due to differences on governance issues, i.e., Hungary having enacted one-man rule by decree.

The FOMC meeting is up later today and the chief focus there will be how the Fed positions and explains its unprecedented actions of the last many weeks and how it sees its role from here. The question and answer session in the press conference may provide the best sense of the Fed’s stance at the moment. Most important in the longer arc of this is that the Fed’s actions cut deep into domestic political implications.

 

Chart: EURJPY
Despite the skirting of any immediate existential strains after last week’s EU Council meeting and a considerable bounce in the Italian public debt (BTPs), the EURJPY cross remains heavy and below the major support line, and we still consider EU existential questions a clear and present danger for the medium term. The JPY looks remarkably bid given the backdrop and the BoJ’s “unlimited” purchases comments and suggests that capital flows are JPY supportive for now and could become profoundly so if risk sentiment ever rolls over and drives a broader and more intense JPY rally. The next major support level lower comes in around 110.00.

Source: Saxo Group

The G-10 rundown

USD – The USD is weak and will remain that way as long as hopes for the outlook on what the other side of this Covid19 crisis looks like remain buoyant and risk sentiment is strong. A key test later today with the FOMC.

EUR – the market is unwilling to draw any longer term conclusions on downside risks from the never-ending concerns that in the long term the EMU is doomed, even if short term strains are constantly averted. Watching EURJPY with interesting on the technical break as discussed above.

JPY – stronger than it looks, given the usually hostile backdrop of strong risk sentiment recently, although bond yields globally have been crushed lower and carry reduced by even the weakest of EMs continuing to chop rates, leaving carry traders in the lurch.

GBP – the 0.8700 area in EURGBP has become the local pivot zone as investors feel reluctant, perhaps, to take a longer term view on Brexit and other factors until the Covid19 crisis has eased more considerably..

CHF – after the signs of massive intervention impressed the market and saw EURCHF spiking higher, the price action has been quick to settle back. Untradeable.

AUD – I am getting uncomfortable with this AUDUSD rally at these levels, although still some technical room to run up to 0.6675, the old cycle low from late 2019. At the margin, perhaps hopes for a Chinese recover and large Chinese stimulus announcement ($600 billion) helping to drive this latest surge. Bears don’t have much of an argument unless we quickly reverse this last leg of rallying price action.

CAD – last local pivot in USDCAD comes in just ahead of 1.3850 – prefer to watch for bullish reversals rather than to expect that we entirely reverse the Covid19-inspired rally from the sub-1.3500 base.

NZD – same comments as for AUDUSD for NZDUSD, although the surprisingly steep AUDNZD rally means that NZDUSD has  yet to rally above its local 0.6130 pivot, and the bigger resistance overhead is not until the 0.6200 area.

SEK – as noted above, important that RIksbank signals lack of interesting in going back into negative rates for now – but 10.70 areas is an important nut to crack to get EURSEK lower still and a sustained SEK rally needs an improved economic outlook and fiscal stimulus in Sweden

NOK – EURNOK has likely topped for the cycle as long as the crude debacle fails to pick up any further intensity from here, and Norges Bank is on the watch and government stimulus means NOK purchases must be raised. Still, reluctant to call EURNOK below 11.00 without more profound recovery in oil and gas prices.

Economic Calendar Highlights (times GMT)

  • 1230 – US Q1 GDP first estimate
  • 1800 – US FOMC Meeting
  • 1830 – US FOMC Powell Press Conference
Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, 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. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such 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.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide and Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.