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FX Update: Risk sentiment whiplash takes commodity FX higher still.

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  The market has reversed recent trends violently this week, starting yesterday but really following through overnight as the omicron covid variant news flow looks promising thus far, while further easing signals from China overnight have further buoyed sentiment. The Aussie is leading the charge on this backdrop and aided further with a slightly more optimistic RBA overnight. Next event risks are the Friday US CPI and especially the FOMC meeting next Wednesday.


FX Trading focus: Whiplash for Aussie traders as risk sentiment

We have seen quite the sentiment shift from the get-go this week after the market was recently churned by the twin threats of a more hawkish Fed and the omicron virus variant news. The impact of the latter has faded quickly on generally hopeful news that, despite the variant’s apparently high contagiousness, the virulence appears generally low in early studies. A full unwind of the omicron impact would require a further few dollars rise in crude oil prices, but the strong surge in risk appetite to start the week, accompanied by a stout comeback in commodity FX and a retreat by the Japanese yen, are a whiplash-inducing change from last week’s action. Different markets are operating at different speeds and with a differentiated focus. For example, US treasuries at the long end have been sluggish to sell-off on this latest resurgence in risk appetite as virus relief might bring back forward Fed rate hike anticipation and with it the fear that the US economy won’t be able to withstand more than a 150 basis points or so of eventual hikes in coming quarters before triggering a recession. The latter may prevent the JPY from sliding much further, unless longer yields rush significantly higher.

Overnight, the bounce-back in sentiment got a tailwind from fresh signs that China is set to ease policy after the latest CCP Politburo meeting statement softened the language on the property market and promised to support economic stability next year. Seasonality into the holiday season is also a strong support for risk sentiment, especially with omicron worries trying to lift.

The Aussie is higher on the recovery in Asian sentiment on the hopes for easing in China, the rise in iron ore prices, and the general backdrop of stronger risk sentiment. A modest further boost came from an RBA that sounded slightly more optimistic on the outlook for wages, which are a key focus for policy lift-off down the road, as the word “gradually” was removed from the expectations for rising wages. As well, the bank specifically expressed the view that it didn’t expect the omicron variant to derail the recovery. AUDNZD has executed another about face this week as well, with 1.0500 resistance looking important there.

Later today, US President Biden and Russian President Putin are meant to meet as Russian troops are massed at the Ukraine border. The US has aired the threat of sanctions against Russia’s banking sector and even the “nuclear option” of cutting off Russian access to the global SWIFT payment system. The market is mostly only pricing the strain in the ruble, but that could quickly change if this situation doesn’t move in the “right” direction.

Chart: AUDJPY
A pair like AUDJPY has shown high beta to the recent downs and ups in commodity prices and risk sentiment, with a significant jump off the lows posted near the close of last week on a comeback in risk sentiment and hopes for policy easing from China next year. The AUDJPY chart shows a steep wall indeed to climb for bulls, as the rally to multi-year highs above 86.00 in October and then subsequent full retreat suggest a significant structural top for now. Resistance is perhaps 81.65 (38.2% retracement) followed by the 200-day moving average, currently at 82.85. Note the Ichimoku cloud levels coming in ahead of that area as well.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength
We have seen big momentum shifts in recent days for the G10 small currencies, but it will take more to argue that the established trends (JPY, CHF and USD strength) are getting neutralized here.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
EURJPY is an interesting JPY pair to watch as the JPY has come under pressure over the last couple of sessions, having teased below the important 128.00 over the last week without following through – stand or fall? Another interesting pair to note is NZDCAD, which is poking to new 18-month lows as CAD picks up support from higher oil prices and Bank of Canada expectations pushing close to highs for the cycle, while the RBNZ rate hike anticipation momentum has eased after the latest meeting’s less hawkish guidance. On the same note, notice AUDNZD trying to flip back higher after multiple direction changes in recent weeks.

Source: Bloomberg and Saxo Group

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