background image background image background image

Yield thrives on market distress

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Several JPY crosses have pushed to new lows as risk sentiment has soured anew overnight. Risk measures beyond the equity market are beginning to show some notable strain as well. Today’s Bank of Canada meeting could see USDCAD breaking higher.

The double whammy of weak risk appetite – not just weak equities, but especially the aggressive rally in global sovereign bonds, has weighed on JPY crosses, with USDJPY perched just above the recent lows and EURJPY and GBPJPY testing new lows for the cycle overnight.

The global benchmark for risk appetite, the US S&P 500 index, closed right on the important 2800 area technical level and slipped below that level overnight in the futures market. Other measures of risk are showing some strain as well – high yield corporate credit spreads look a mirror image of equities, but EM spreads have risen to new highs relative to the early April extremes. And a few EM currencies are starting to show more notable strain: USDZAR closed at a new local high yesterday, as did USDSGD and late yesterday the USDCLP (the Chilean peso long a proxy for copper prices) took out the significant 700 level – its highest close since early 2016.

On the trade front, a rash of speculative articles, referencing “pointed” rhetoric in the Chinese press, suggest China could look to weaponise rare earth minerals exports to the US in the ongoing trade showdown. It is clear that China is settling in for a showdown, not wanting to appear the weaker hand. Arguably, the Chinese gambit is to weaken the US stance by hoping that a weakening of confidence will either hit the US equity market and weaken Trump’s resolve and/or affect his chances in the 2020 election next November. Either way, it is tough to see a path to an immediate thaw in the relationship.

The EU’s Donald Tusk, strongly backed apparently by other EU political leaders, has signalled an unfriendly stance from the EU side on the prospect of opening up Brexit negotiations. Only the “political declaration” is seen as open for discussion, not May’s deal. Tusk even claimed that the spectacle of Brexit was behind the weaker-than-feared (for pro-EU forces) showing of populists in the EU parliamentary elections. The Brexit situation is as murky as ever.

Today’s economic calendar includes Sweden’s Q1 GDP (expected sub-2.0% YoY), Germany’s Unemployment Rate and Change (when are the auto industry woes going to see a broader uptick in job losses?), and the Bank of Canada meeting, where we see a somewhat higher risk of a dovish tilt to the guidance. It’s a difficult call, but given the long string of falling growth data out of Canada and risks from the US-China trade showdown, Poloz and company might err on the side of caution. CAD bulls will point to Citi’s economic surprise index strongly outperformed expectations this year. 


Clear overhead resistance line in USDCAD ahead of today’s Bank of Canada decision – will Governor Poloz and company fall in line with the global (ex Norway) tilt to easier policy guidance? Today’s decision comes with USDCAD implied volatility near 5% for 1-month – believe it or not well above the Jun 2014 record low of 4%. 
Source: Saxo Bank
The G10 rundown, express edition

USD – the US dollar rebounding smartly from recent weakness despite collapsing yield spreads as US yields dive all along the curve – a strong sign of safe haven seeking.

EUR – EURJPY has broken lower and we watch within the G-3 for whether the single currency is the weakest (EURUSD breaking down) if current risk sentiment conditions worsen.

JPY – riding high on the sovereign bond rally and weak risk sentiment – requires constant fuel from these sources to driver further strength.

GBP – don’t see how we draw any immediate conclusions on Brexit until the new Tory leader is determined and the stance that the new leaderships signals. GBPUSD risks to 1.2500 and perhaps then some if risk sentiment generally worsens.

CHF – absorbing safe haven flows, which could intensify and test the SNB’s mettle if Germany-Italy yield spreads continue to widen.

AUD – the parabolic rise in iron ore prices finally faltering over the last couple of sessions, which removes some support for AUD, still a proxy for the US-China trade showdown and general risk sentiment.

CAD – trigger level to the upside nearby in USDCAD at 1.3500 and could slip higher to test the highs for the cycle if the Bank of Canada cooperates with dovish guidance.

NZD – the Reserve Bank of NEw Zealand financial stability report released to few fireworks, but reminds us that the RBNZ is in favour of higher bank capital requirements, which would impact NZ growth and eventually the currency. The AUDNZD turnaround looking more compelling overnight as the nosedive in NZ short rates intensifies.

SEK – EURSEK attempts lower have proven weak and the backdrop is not SEK-supportive. Important test today for SEK with the Q1 GDP release. 

NOK – tentative signs of resistance to further NOK strengthening yesterday and NOK vulnerable on worsening of risk sentiment. Norway credit growth indicator up this morning.

Upcoming Economic Calendar Highlights (all times GMT)

0730 – Sweden Q1 GDP
0755 – Germany May Unemployment Change / Rate
1400 – Canada Bank of Canada Rate Decision
1700 – Mexico Central Bank releases Inflation Report
2245 – New Zealand Apr. Building Permits

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

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 (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

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

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

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.