FX Update: Spotlight on JPY crosses and EURNOK

Trading focus:

USD reaction over and on the other side of Fed Chair Powell speech: already covered this week, particularly in yesterday’s FX Update. We’ll update our impressions of the action on the other side of the speech in tomorrow’s update.

JPY crosses – an interesting development of note in recent sessions has been the Japanese yen’s sympathetic gyrations with the increased volatility in safe-haven bond markets, which will inevitably take their signal from Fed Chair Powell’s speech today as well. (The JPY often moves in positive correlation with bond prices, negative correlation with yields) Since the trough of the market crisis back in March, the lower safe haven yields, strong rebound in risk appetite and the commodity price rebound have driven a reflationary narrative that have generally sunk the JPY. The Powell speech event risk could have profound consequences for the market’s confidence in its underlying narrative for the better or the worse, and the implications for the JPY could easily be as affected as for the US dollar. If the Powell speech proves a “sell the narrative” moment and yields back down and risk appetite goes negative, we would likely see a JPY lurch to the upside – with EURJPY the JPY cross closest to approaching interesting downside pivot levels as we look at below. If the market is impressed with Powell’s Average Inflation Targeting (AIT) argument and yields rip higher as bonds sell off (under the assumption that any eventual yield cap policy only comes much farther down the road), the JPY could fall sharply again. Stay tuned, the JPY volatility could match or exceed that for the US dollar today and tomorrow.

Chart: EURJPY
EURJPY has come under some pressure in fits and starts over the last two weeks of trading and we eye the 124.00-50 area in the wake of today’s Powell speech, with further downside potential quite large if the market at least temporarily waxes cautious again on the outlook and bids back up safe haven bonds in the wake of the speech after a recent sell-off that had generally taken the JPY to new lows basket-wise versus the other G-10 currencies. Either way, the speech is a test of the narrative since the market trough and commodity recovery that took place in late March into early April and drove the JPY weaker over that time frame (such that AUDJPY just scraped a new cycle high ahead of Powell’s speech today).