FX Update: Risk rally drives weaker JPY, GBP bid returns FX Update: Risk rally drives weaker JPY, GBP bid returns FX Update: Risk rally drives weaker JPY, GBP bid returns

FX Update: Risk rally drives weaker JPY, GBP bid returns

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  Risk appetite returned to the FX market overnight on news of Trump's willingness to meet his Chinese counterpart on the sidelines of the G20 meeting in late November, but whether or not this upbeat mood prevails for long remains to be seen.


Risk appetite has rallied hard since late yesterday as US President Trump announced his intention to meet Chinese leader Xi Jinping at the late November G20 meeting in Argentina. The USD and JPY have eased lower in response, but other interesting subplots have also emerged.

The transmission or contagion from the latest turbulence in equity markets has been weak into foreign exchange, so the dramatic relief rally overnight has likewise only driven modest mean reversion in many of the major currencies, with the USD back a bit weaker and JPY a bit more so. Today’s close will offer an important signal on whether risk sentiment will stabilise for now or take us into a very uncomfortable weekend. 

The most readily apparent driver of the relief rally was the news that Trump is open for a meeting with Xi on the sidelines of the G20 meeting in Argentina in late November. This has very little to do with the narrative linking the equity sell-off to the rise in the price of longer-term money and, if anything, a trade deal (we’re a long way from that in our view) might risk an even more aggressive move higher in US rates.

Yesterday’s Swedish CPI print prompted a sharp SEK rally as Sweden reported a core CPI of 2.5% for September versus 2.3% expected. With a policy rate of -0.5% and having committed to either a 25 basis point hike in December or February, the market suddenly realises that the hike will come at the sooner rather than the later date. 

Chart: EURSEK
SEK making a splash yesterday as the strong CPI report boosted rate expectations and has the market pricing in a December rate hike rather than a longer wait. This finally has EURSEK re-engaging lower after the promising start from the 10.69 area and the next step will be the watch for a break of the 10.25 area for potential all the way down into 10.10 to 10.00.

EURSEK. Source: Saxo Bank

The G-10 rundown

USD – the greenback trades indifferently here – pulled in too many directions. Positioning suggests weakness risk, but that is somewhat offset by its tendency to serve as a safe haven when risk deleveraging is most intense. But if risk appetite improves, do we then go back to watching US yields lift higher, therefore supporting USD strength?

EUR – Italian yield spreads remain elevated but not going anywhere as Italy shows all signs of continuing to pursue a showdown with the EU over its budget, as the parliament voted in favour of the expanded deficit for the 2019 budget. Next week could provide the next battery of headline risks.

JPY – the yen back to the weak side in kneejerk reaction to . But if yields head higher we get quickly back down to focusing on whether the BoJ is forced to indicate a policy shift as 10-year JGB’s trade up against the 15-basis point yield “cap”.

GBP – sterling is catching a bid again this morning and plenty more room for GBP strength if markets are generally stabilising and we get the positive Brexit headlines the market is gunning for next week. Note GBPCHF trading up at its 200-day moving average near 1.3100 and for perspective, consider that the 200-week moving average doesn’t come in until close to 1.3500.

CHF – as we note above, the franc’s recent weakness despite worse-than-wobbly risk appetite and EU existential stress sticks out like a sore thumb. EURCHF making an interesting go above the local pivot level of 1.1440 and eyeing the perhaps psychologically more important 1.1500 level.

AUD – with the firming CNY yesterday and massive rally in gold, would have expected a more robust response from AUD yesterday, though it did manage to entirely reverse the prior day’s losses in the case of AUDUSD, where we see the risk of a large short squeeze if risk appetite stabilises and the CNY maintains the floor.

CAD – USDCAD is easing back toward the 1.3000 pivot area after the recent chunky oil market correction. The chart is a mess. Next Friday, Canada reports home prices and on Friday, the September CPI.

NZD – next Wednesday’s Q3 CPI from New Zealand the next reason to pay attention to the kiwi in relative value terms as the AUDNZD pair has gone into hibernation.

SEK – a chunky SEK rally worth believing in as the strong CPI release yesterday jolted Swedish rate expectations higher as the Riksbank now seen as a lock to hike in December.

NOK – a more modest comeback for NOK relative to SEK on the NOKSEK breakout brushback and weaker oil prices, but still constructive on EURNOK downside potential.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

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)

Saxo Markets
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets UK Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992