FX Update: Waxing cautious on risk correlated FX.
Head of FX Strategy, Saxo Bank Group
Summary: Movements in FX are moving sharply against recent trends as the commodity dollars are suddenly on their backfoot, while a less dovish than expected ECB is seeing the euro firming across the board, with the USD likewise firming against risk-correlated FX, especially in EM. The SaxoStrats team is urging near term caution on risk exposure, and this goes for currencies as well.
FX Trading focus: waxing cautious on risk-correlated FX
In today’s Saxo Market Call podcast, we waxed cautious on risk exposure, in part on signs of the correction in some of the most speculative assets that have been the star performers since the pandemic lows of last spring. Our CIO Steen Jakobsen also penned a note along the same lines and urges caution as well, also pulling out AUDJPY as a traditionally very good risk proxy, a chart of which I look at below. Yesterday, I also noted briefly in my G-10 rundown that, although the conditions for USD weakness had been about as supportive as they possibly could be in recent days, with treasuries trading sideways and maximum risk-on in global equity markets, the USD weakness underwhelmed. This may also be a sign that momentum in recent larger trends is flagging.
The ECB yesterday is one of the fundamental developments that is cause for pause for those believing central banks will continue to underwrite liquidity expansion and financial conditions to infinity and beyond. In the ECB presser, President Lagarde said that the ECB might not even have to employ all of its expanded target of purchases if financial conditions remain favourable, and it is worth nothing that some peripheral spreads were backing up recently even before this rather odd statement, even if Lagarde also equivocated that an expansion of purchases could also be necessary. Peripheral spreads backed up even more sharply yesterday and are at a new high for the year in the case of Germany-Spain 10-year debt at 63 basis points and at highs since early November for Germany-Italy 10-year debt at north of 120 basis points today. Add this to the recent Fed talk of taper, even if that was pushed back against (with cryptic comments from Clarida that could be read as not so dovish, assuming inflation does actually pick up), and then the pushback on negative rates from the BoE’s Bailey and a more optimistic Bank of Canada and one gets the sense that, despite ongoing pandemic limitations on the ground, the delta on central bank guidance has flipped to the hawkish side, however gently.
We have the next FOMC meeting up next Wednesday, by the way.
AUDJPY has long traded as an excellent risk proxy among G-10 pairs, traditionally from a carry perspective as Australia used to run one of the higher policy rates within G-10 and Japan has wallowed around close to zero for more than two decades. In more recent times, it is more about Australia as a proxy for the reflation trade and the strength in specific commodities, especially iron ore and the demand for Australia’s exports into the star performer since the pandemic breakout, China. So if we are set to see a second guessing of the risk-on parade, and to some degree the reflation trade (perhaps to be differentiated from the simple inflation trade, which is less positive) – a risk-correlated pair like AUDJPY could be in for a correction. Note that the MACD has crossed over to the downside, suggesting that AUDJPY is at a pivotal point here after mounting a low-energy retracement of the recent sell-off, and generally not correlating well with the recent surge in mny other risk assets. The pair can push all the way back to 76.50 without beginning to really strain the up-trend.
Odds and Ends: sterling stumbles and inflation
Sterling struggling: the rally in sterling has stumbled rather badly after new cycle highs for the pound against both the USD and the euro were explored earlier this week. This is at least the fourth time that new highs in GBPUDS have been rejected, but the EURGBP backing up above 0.8900 is particularly disappointing, given the. The latter may be down to the ECB surprise, and the action hasn’t backed up sufficiently to fully reject the recent sell-off move, but it’s not a welcome development, and any follow through back higher through 0.9000 would put the kibosh on talk of a sterling revival for now.
The New Zealand CPI came out overnight, and interesting to see it coming in as hot as it did at 0.5% QoQ and +1.4% YoY vs. +0.2%/+1.1% expected, given that the currency rose some 4.5% in trade weighted terms and 10% in JP Morgan’s real-effective adjusted terms in the fourth quarter. Inflation is going to be a tremendous focus, as well as whether medium-and longer rates, as well as central bank policy expectations, react to the incoming inflation data or try to get clever (like the Bank of Canada did in its statement) on inflation calming again once a few months of base-effect driven jumps has faded.
Upcoming Economic Calendar Highlights (all times GMT)
- 1330 – Canada Nov. Retail Sales
- 1445 – US Jan. Flash Markit Manufacturing and Services PMI
- 1500 – US Dec. Existing Home Sales
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)