FX Update: Diminishing returns from trade deal headlines? FX Update: Diminishing returns from trade deal headlines? FX Update: Diminishing returns from trade deal headlines?

FX Update: Diminishing returns from trade deal headlines?

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The recent reversal in USDJPY looked like a classic trading setup for bears, but the subsequent rise in safe haven yields since the FOMC meeting last week is boosting the pair again and threatening a reversal of the reversal. The currency market showing little energy, but interesting to note the USD resilience here and that the latest trading headlines may point to diminishing returns.


The low volatility environment persists as yesterday saw risk sentiment continuing to improve, though without as much bearish price action for the US dollar, an interesting disconnect that we’ll have to monitor, though the signal too weak at this stage to merit much attention. The only consistent behaviour is in the Japanese yen, which remains soft with every fresh downtick in global safe haven bonds (and rise in yields). More on USDJPY in the chart below, but generally, currencies are generally in a passive mood, absorbing intermarket developments.

 In yesterday’s chart highlights, we noted that NZDUSD was threatening above a critical area, but so far showed signs of rejecting the attempt higher and interesting to see that the Antipodeans (AUD and NZD) didn’t get much out of the latest US-China trade deal noise, in which the US side is said to be considering dropping existing tariffs on more than $100 billion of Chinese imports. Specifically for NZ, note that the country reports its Q3 employment and wages data tonight.

The RBA left rates unchanged as universally expected overnight, and in its latest statement expressed the hope that lower rates will re-invigorate the property bubble (not the RBA’s words, which were: “The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth.”). The rather long statement is an expression of hope that things will return to normal, but Australia’s debt saturated economy is not likely to experience any profound recovery, and the low rates may bring stabilization to property markets, but won’t restart the bubble. The Markit Services PMI for Australia has been scraping along around 49-52 over the last many months and was out at 50.1 overnight after a bump in September. In short, while the RBA has flagged that it is unwilling to consider negative interest rate policy, it is on path for at least another cut and possibly two while joining the global call for fiscal stimulus on further economic weakness.

In her first speech late yesterday, ECB president Lagarde avoided monetary policy comments as she stood before a German audience at an award ceremony for former German finance minister Wolfgang Schaeuble. It wasn’t the venue for saying anything of note – which she thoroughly avoided doing. Schaeuble was a consistent voice against bailouts and exposing the German balance sheet in the approach to dealing with the EU debt crisis back in 2010-12, even as it was German savings getting recycled through the periphery and blowing up asset bubbles there that sparked much of the crisis in the first place.

Chart: USDJPY
USDJPY continues to offer currency traders a proxy for trading the US treasury market, as the latest weakness in US treasuries is seeing the key yield benchmarks re-approach their recent highs. An important psychological level for yields if we do continue to see weakness in treasuries is the 2.00% level (current yield near 1.80% vs. the 1.90% high from September), with USDJPY probably pulling above recent highs and challenging 110.00 if we’re set for a further melt-up in risk sentiment that weighs on safe haven bonds.

Source: Saxo Group

The G-10 rundown

USD – the greenback putting on a show of resilience despite the ongoing risk appetite semi-meltup – an interesting divergence with recent behaviour that bears monitoring over coming sessions.

EUR - EURUSD bulls hoping for a breakout and wanting to celebrate the positive headlines on US and the Europe likely avoiding any showdown over auto tariffs for the moment have instead seen the pair drifting back lower – if we head back below 1.1100, the outlook turns increasingly neutral tactically.

JPY – the yen a proxy for global safe haven bonds here and likely to remain that way, with all eyes on the US long end and the 2.00% level for the 10-year benchmark.

GBP – election uncertainties are preventing directional moves in sterling for now and keeping implied volatility from falling further, with the 3-month implied still around 10%. Interesting to see how the consumer is holding out in today’s UK Services PMI as the UK credit impulse has collapsed for several quarters.

CHF – not getting a signal from the franc.

AUD – the RBA not surprising in any way and the market is priced for a pause here. Most interesting from here is whether the coming US-China trade deal has already been priced in, on the assumption we’ll only see a symbolic phase one deal with few implications for global growth.

CAD – CAD longs still licking their wounds from the dovish caution expressed by the BoC last week – 1.3200 beginning to look like an important upside pivot in USDCAD if the lay of the land shifts in favour of the USD. Energy prices doing all they can to support CAD in the background.

NZD – important employment data tonight for NZD traders – particularly given the pivotal area in NZDUSD around 0.6425 explored yesterday and important for the relative strength battle in the very choppy AUDNZD cross.

SEK – the backdrop and steep backup in Swedish short yields supportive of a EURSEK breakdown- but seeing is believing. Meanwhile, we are concerned about the trajectory of the Swedish economy as it dips into recession – the latest Services PMI survey and other noise out of Sweden today up this morning as noted in calendar highlights below.

NOK – crude oil prices and strong risk sentiment are supporting NOK in the background and we have a very nice symmetrical rejection in EURNOK of the prior rally wave, but need to punch down through 10.05-10.00 from here to suggest the lows are in for the krone.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0830 – Sweden Sep. Industrial Orders
  • 0830 – Sweden Riksbank minutes
  • 0930 – UK Oct. Services PMI
  • 1330 – Canada Sep. International Merchandise Trade
  • 1330 – US Sep. Trade Balance
  • 1445 – US Oct. Markit Final Services PMI
  • 1445 – Sweden Rikbank Governor Ingves to Speak
  • 1500 – US Oct. ISM Non-manufacturing
  • 2145 – New Zealand Q3 Employment/Wages

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