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
John J. Hardy

Head of FX Strategy

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

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • 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
  • 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
  • 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
  • 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

Saxo Capital Markets (Australia) Limited 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.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

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)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

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) Limited 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, Product Disclosure Statement and Target Market Determination 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. 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. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

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.