Nervous conditions continue to support JPY Nervous conditions continue to support JPY Nervous conditions continue to support JPY

Nervous conditions continue to support JPY

Forex 6 minutes to read
John Hardy

Head of FX Strategy

Summary:  The US session on Friday didn’t manage a convincing enough rally in equity markets to brighten the global mood and we start the week in a risk averse funk that continues to support the Japanese yen. Focus this week remains on animal spirits and Italy headlines.


Although currency market moves are very muted here relative to the volatility in equity markets, the Japanese yen remains the most volatile currency, with USDJPY posting new lows this morning and other JPY crosses suffering breaks of local support. Japanese equities have suffered a vicious reversal over the last few weeks and international reduction of exposure to the Japanese market and the related lifting of currency hedges could be a driver on top of the traditional focus on the behaviour of domestic investors. Oddly, despite the dark mood, emerging currencies have fared well, perhaps as the US dollar has gone sideways, as have US treasury yields. Emerging market yield spreads have widened very little during this rather violent correction in major equity markets.

Hopes for Brexit breakthrough over the weekend were dashed as talks broke down on Sunday, meaning we are hardly likely to see a breakthrough at the EU summit this week. The Brexit deadline is fast approaching and the mid-November summit suddenly looms a month from now. EURGBP has erased most of last week’s gains and the pair needs to stay below the 0.8825-50 pivot area to avoid a fresh squeeze.

Italy has delivered its budget specifics to the EU, which will have a chance to look through the budget proposal in detail and respond this week, meaning we have another week of headline risk.

Complicating the EU existential backdrop were the Bavarian state elections over the weekend, which saw the CDU sister party CSU losing close to a quarter of its support and netting the worst result in some 70 years, while the SPD lost more than half of its voters as the rank and file express disgust with the party’s participation in the grand coalition. It is clear that the centre is not holding anywhere in European politics. The lost votes for the two parties went to the Greens and even more so to the AfD, which was on the ballot for the first time. Some speculate that if Merkel’s CDU polls poorly and demonstrates that the current government has lost majority support, she may have to step down at the CDU party conference in December and that new elections could arrive well before 2021.

Chart: USDJPY

The strong JPY is one of the few consistent themes here and the pivotal 113.00 area of the prior highs from the summer gave way last week – but the bigger sign of a breakdown here doesn’t arrive until we see the pair swinging down through the 61.8% Fibo near 111.60 and perhaps the Ichimoku cloud area around 111.00.
USDJPY  (source: Saxo Bank)
The G-10 rundown

USD – no one seems to know what to do with the US dollar, perhaps as market conditions are pulling the currency in two directions simultaneously. Risk off is traditionally USD supportive as markets prefer the liquidity of the US dollar, but the fear is perhaps that US treasuries are inferior safe havens this time around as it was the rise in US yields that has driven at least some of the markets’ instability.

EUR – the euro will be held back by Italian budget concerns until that 2019 budget has passed muster. A Brexit fiasco could also weigh in the euro crosses. Technically, EURUSD is in limbo between 1.1800 and 1.1500.

JPY – as noted above, the JPY thrives in these conditions and an extension of global deleveraging would likely drive further strength. Still, the trading ranges look muted relative to the big expansion in volatility in equity markets last week. 

GBP – another headline-driven sell-off after the market got ahead of itself in pricing in progress in Brexit negotiations. Traders are warned that “it ain’t over ‘til it’s over”.

CHF – the EURCHF nipped in the bud, likely on Brexit disappointment via a GBPCHF correction as much as anything else. Disappointing for CHF bears if EURCHF can’t maintain above 1.1400-ish.

AUD – AUDUSD channel has been mesmerising in its regularity and any squeeze here needs to fully challenge the top of the channel and close above – currently around 0.7200 – to begin to signal that the downtrend is under siege.

CAD – the ugly correction in oil prices and risk off keeping the pair clear of 1.3000, with the rate spread suggesting no reason to look for CAD outperformance. The recent rally is bullish is the pair maintains altitude here. 

NZD – CPI data up late today – a rare glimpse of fundamental NZ data. AUDNZD is mired in limbo and we await a pulse before expressing a view, though we are looking ways to short the kiwi.

SEK – last week’s strong CPI print inspired a rally and now we look for follow through – which would be a more straightforward affair were it not for the backdrop of nervous asset markets and EU existential risks.

NOK – EURNOK getting into interesting territory as 9.40 approaches as the pair hasn’t closed below this level in a year. With oil under pressure and less interest in coming Norges Bank activism relative to the Riksbank after last week’s Swedish CPI release, would expect more NOK to underperform SEK.

Upcoming Economic Calendar Highlights (all times GMT)

1230 – US Oct. Empire Manufacturing
1230 – US Sep. Retail Sales 
1430 – Canada Bank of Canada Survey
1600 – Eurozone ECB’s Nouy to Speak
2145 – New Zealand Q3 CPI
 

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