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Muted FX reaction to market meltdown Muted FX reaction to market meltdown Muted FX reaction to market meltdown

Muted FX reaction to market meltdown

Forex 6 minutes to read
John Hardy

Head of FX Strategy, Saxo Bank Group

Summary:  Many of the usual correlations in FX were in evidence as equity markets suffered a remarkable meltdown yesterday, but currency market moves feel muted relative to similar incidents in the past.

Many of the usual correlations in FX were in evidence as equity markets suffered a remarkable meltdown yesterday, but currency market moves feel muted relative to similar incidents in the past.

The US equity market closed yesterday with a chunky loss of over 3% for the broader market and a loss of more than 4% for the high-momentum, tech-weighted Nasdaq 100 containing the largest, most popular names. As was the case back in early February of this year, the violent acceleration of the selling relative to recent quiet volatility and small trading ranges magnified the impression of the size of the move.

The bond market rally one would normally expect as traders head for safety was rather muted, perhaps as rising yields of late, as was the case in 1987, are providing some of the fuel for the intensity of this move. The move continued overnight, with US futures down over 1% at one point and the Japanese Nikkei Index in a brutal session that wiped out the remainder of gains from September and then some. 

Reaction in the currency market was largely along the lines one would expect, with the Japanese yen seizing the initiative and cutting a path of destruction across the landscape. The idea, as ever, is that Japanese savings sloshing around the world in higher-yield and higher-growth areas come sloshing back home when Japan’s savers decide to sell assets and repatriate. Elsewhere, however, volatility felt a bit muted – all of the G10 small currencies were weak, but not remarkably so (AUDUSD not even posting a new low) and EM looks surprisingly stable even if under pressure, with some of the support likely coming from China’s persistence in maintaining the CNY floor.

In Europe, Brexit hopes are confusing the mix and normal reaction patterns, likely keeping a CHF rally at bay and supportive of course of GBP and maybe even the Euro to a degree as Italy’s BTP yields are rather orderly. The US is less of a safe haven than normal because the market was already rather long of USD and falling US rates erode some of the narrative driving the stronger USD of late.

The timing of the move is more than interesting with the US mid-terms just weeks away, as President Trump has egg on his face from all directions at the moment after the bruising Kavanaugh court nomination and his mocking of women claiming sexual assault, a massive sudden hurricane Michael that may be the most intense to ever make landfall in the US, and now a market meltdown that could be set to get even worse.

Trump is already out blaming Fed chair Powell for the stock market sell-off, saying that the Fed has “gone crazy”. Sorry, President Trump, but the crazy came well before Powell. And it would be very convenient for Powell if today’s US CPI release prints higher than expected.

The US Treasury auctions yesterday went off without a hitch, if a bit on the weak side – more interested purchasers when a market meltdown is afoot!


We return to USDJPY, where the pair has taken out the pivotal 113.00 area and will likely continue to look heavy until this equity market deleveraging has played itself out. Maximum risk until volatility is clearly fading. It feels like something has broken here and that this will take a very long time to recover. If so, we may have seen the high in USDJPY, though a more profound sense that the market has turned could be a full retreat below 111.00-110.00, which contains the Ichimoku cloud, the prior price pivot and the 100- and 200-day moving averages.
USDJPY (source: Saxo Bank)
The G-10 rundown

USD – falling US yields yesterday removed a pillar of support for the greenback, even if the big dollar is generally preferred to smaller, less liquid currencies in these deleveraging events, purely from a liquidity perspective.

EUR – the euro holding up rather well, with the 1.1500 pivot level in EURUSD still intact and the EU existential risks stable for the moment despite all the noise elsewhere.

JPY – plenty more room for JPY upside if the risk deleveraging continues and we have interesting technical developments in USDJPY as we discuss above.

GBP – Brexit hopes buoying sterling, and plenty more room for broad upside – especially if the risk-aversion fades elsewhere – if we see further headlines pointing toward a deal. As I tweeted yesterday, May’s effort to make a softer Brexit deal that can garner a reasonable number of Labour votes is good politics if it works, as it makes the Brexit decision look more like Britain’s decision is some of the opposition sign on, rather than a charged, fully partisan situation.

CHF – again, with Brexit hopes intensifying here, and with a different setup this time around than in 2008-09 on the status of Swiss banks and the carry trade (no CEE mortgages denominated in CHF, for example), the franc is not the safe haven it used to be. This should underline the downside risks for the franc if conditions can normalise. 

AUD – as we note for the kiwi, the AUD weaker, but not remarkably so relative to historic episodes of market volatility and China’s maintenance of the CNY floor anchoring the AUD for now, though all bets are off if China shifts the goalposts on the renminbi.

CAD – CAD sharply weaker as the technically important 1.3000 level gives way in USDCAD and as oil prices slumped sharply yesterday. More room for upside here as the CAD strength in the crosses story could fade for a while as long as US markets are under pressure.

NZD – an island of odd calm as the storm rages – kiwi volatility likely anchored by the stability China has imposed on the renminbi – look out for potential volatility if this source of stability disappears.

SEK – the krona weaker on the traditional distaste for less liquid currencies when risk aversion is afoot. The SEK is still very weak in the bigger picture, but technicians will want to see SEK making a stand before getting involved on the long side and for broader market volatility to ease. Also see on NOKSEK below as we await the September Sweden CPI number this morning.

NOK – NOK so far less affected by the hubbub than its Scandie cohort and the NOKSEK break of 1.1000 has taken the pair to territory not visited since early 2015 – will the huge correction in oil prices weigh, however?

Upcoming Economic Calendar Highlights (all times GMT)

0730 – Sweden Sep. CPI
1130 – ECB Meeting Minutes
1230 – US Sep. CPI
1230 – US Weekly Initial Jobless Claims
1720 – US Fed’s George (Non-voter) to Speak


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