FX Trading focus: Risk-on tone as safe havens decline. AUD bids for bullish reversal
The pattern across currencies suggests a very risk-on environment as the safe haven currencies have started off the new month with a big jolt lower, as the trio of USD, JPY and CHF were all sharply lower and have extended a bit lower still in places today, just as the formerly weakest in class, the Aussie, has now more or less completed a v-shaped bullish reversal in the key pairs where it was weakest: in AUDUSD (chart below) and in the classic risk proxy AUDJPY. Of course, now that I am writing this, I am noticing that EURCHF is reversing hard from new multi-week highs, but the chief point is the weaker US dollar anyway, which suggests positive risk sentiment for EM and pro-cyclical currencies, especially as US yields are lost in the desert sideways at the moment.
On that note, a Bloomberg article reminds us of the extreme USD liquidity situation, pointing out that basis swaps suggest the least demand for US dollars relative to their available, at least, in years. Whether that remains the case into the end of the year when the US treasury issuance situation shifts and the Fed begins to taper may be another matter, but for now, the world is awash in US dollars and the greenback looks very much on the defensive.
Tomorrow, we get the US nonfarm payrolls change print, where a miss is likely better for the market than any outsized payroll gains, as it keeps the Fed sitting on its hands and treasuries likely stuck in a rut as well. But we are leading up to some negative energy and significant volatility in Q4 I am afraid, as asset markets are having too good a time of it, even if the good times might extend in the nearest term.
AUDUSD has now completed a proper V-shaped reversal of its recent sell-off, which may not lead immediately to further gains toward the next key 0.7500 area, but is a kind of exclamation point encouraging the view that we have seen the lows for now after the run down to the 0.7105 area lows before this rally emerged. A record Australian trade surplus data point overnight helped remind us of the longer term shift in the current account fundamentals, which have accelerated in the Aussie’s favour over the last year, with the Covid outbreak and the RBA’s pedal to the QE metal (and the recent commodity setback) providing off-setting pressure until the last week or so. This rally – also in the crosses since yesterday – suggest that the AUD underperformance could be set to ease for a while here and mean revert to the positive side.