Macro
Saxo G20 Risk Radar: October 15, 2018
The latest edition of Saxo's G20 risk radar places Brexit and the Sino-US trade war in focus on troubled negotiations and the upcoming G20 summit.
Market switches gears as safe haven JPY reappears
John Hardy
Head of FX Strategy, Saxo Bank Group
North Korean objections to the persona of Trump’s controversial new National Security Adviser John Bolton seem to be at the root of suddenly crumbling prospects for an historic Trump-Kim summit. Yesterday, Trump blamed Kim for “changing the scope of talks” while apparently South Korea is convinced that Bolton’s recent comments are the source of the blame.
In FX, this seems to have been at the root of a suddenly strengthening Japanese yen overnight and a weakening in the smaller G10 currencies, although some support for the JPY was already on the scene over the last couple of session as long US rates have failed to continue to push higher as we noted yesterday. The 3.00-05% area in the US 10-year benchmark was the key pivot zone on the way up and we are now back inside that zone.
Today, the focus in Italy is on whether the Italian president Mattarella will approve the proposed Five Star Movement’s Conte as candidate for prime minister as the post of Italian president retains considerable power. The announcement may or may not come today and Italian rate spreads have eased about 15 basis points narrower from their widest levels yesterday. The most consistent expression of EU existential fears has been in EURCHF, which has notched new lows below 1.1700 and is within striking distance of its 200-day moving average, a key technical indicator in past chart situations.
Other key event risks on the day are the Eurozone flash PMIs for May to see if there is any relief in the brutally negative data surprises of the last few months. Then we are on to April inflation data from the UK, with GBPUSD surviving a mild assault on key resistance before continuing lower yesterday. We noted yesterday that if the resistance into 1.3500 stays in place, the next focus area may be all the way to 1.3000 and even 1.2900.
Finally, we’ll have a look at the latest batch of Federal Open Market Committee minutes and the state of internal debate among Fed members. This is not a particularly anticipated set of minutes and rate expectations have been sidelined as a factor over the last week – meaning that a bar for surprise on the dovish side may be higher.
Chart: AUDJPY
The AUDJPY chart shows the degree of whiplash in FX themes, as the formerly hard-driving commodity currencies were suddenly slapped back lower (USDCAD got a strong boost after probing key support as well). The technical situation in AUDJPY is particularly pivotal, with the Ichimoku daily cloud playing such a prominent role in recent weeks/months, and the 84.0+ area as well as the top of the cloud providing the key resistance. No hope for the bulls here unless that resistance is taken out and the next step lower is the bottom of the Ichimoku cloud, which thins out in coming days and provides less support and then the lows for the cycle, although to get there, we might need to see both a failure of the “rising yields” then as well as fresh and broad risk aversion.
The G-10 rundown
USD – the US dollar rally remains in fairly good shape, though the focus of the strength is more EM and G10 small focus since late yesterday on the latest developments. This theme could deepen, which might see the JPY even outperforming a fairly strong USD.
EUR – the single currency is looking lower now versus the JPY as we would have expected given the circumstances of recent days as EURJPY may be a trade developing in addition to EURUSD for downside potential. Reminder that the 1.1710 area in EURUSD is a major support and perhaps the last one ahead of the 1.1500-1.1600 zone. (1.1500 was a huge structural area back in the 2015-2016 time frame and the actual range last November was 1.1554.
JPY – the JPY is suddenly perking up on geopolitical concern and a so far relative mild bout of risk-off, with easing yield pressures is also helping. Will likely need an acceleration in volatility to keep the JPY bid across the board, but the EM woes are wind at the JPY’s back as well.
GBP – sterling is facing a pivotal data point today that could see the pace of sterling selling pick up on a negative surprise as the market would likely lower expectations for an August rate move further. A risk-off tone is no help for sterling either.
CHF – EURCHF selling has deepened and have to imagine the seats at the Swiss National Bank are getting very warm do to something about the situation – would expect intervention, announced or not, around the 200-day moving average or at least around 1.1500 if that comes into view. Strong ad hoc risks of sudden EURCHF rally now on risk-friendly headlines from Italy if these are possible.
AUD – The Reserve Bank of Australia governor Lowe is to speak later. We suspect the Aussies strong run of luck is emphatically over with if global risk appetite has peaked for now. Note the AUDJPY chart above and the AUDUSD potential lower shaping up if the pair stays below resistance and especially if it cuts below 0.7500.
CAD – USDCAD is teasing range support below 1.2750 yesterday before a quick turnaround, emphasising the strength of that support for now and as the market mood toward the commodity currencies changed suddenly late yesterday. A close above 1.2900 could open the door for a test of the structural upside pivot zone between 1.3000 and 1.3100.
NZD – the kiwi sharply lower after is consolidation never threatened even the first major FIbo retracements against the USD. If risk appetite worsens, the kiwi would prove the weakest of the commodity dollars and a big range level is soon coming into view in NZDUSD not far below 0.6800.
SEK – EURSEK broke lower through the 9.25 area but has paused suddenly as weak risk appetite is a headwind for SEK bulls. A close back above 9.30 would sideline the tactically bullish SEK outlook.
NOK – EURNOK traders no doubt frustrated by the inability of the pair to break the lower support zone and the change of gears late yesterday is no boost to the NOK bulls. This could prove a pivotal day either way for NOK on risk appetite (weak risk appetite less NOK supportive) and US weekly crude inventories.
Upcoming Economic Calendar Highlights (all times GMT)
0700-0800 – Eurozone May Flash PMI
0800 – South Africa Apr. CPI
0800 – Australia RBA’s Lowe to speak
0830 – UK Apr. CPI / RPI / PPI
0900 – Sweden Riksbank on Financial Stability
1345 – US May Flash Manufacturing/Services PMI
1400 – US Apr. New Home Sales
1430 – US Weekly Crude Oil / Product Inventories
1800 – US FOMC Minutes
2245 – New Zealand Apr. Trade Balance
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