FX Update: USDJPY saw most violent single day rally in over 20 years FX Update: USDJPY saw most violent single day rally in over 20 years FX Update: USDJPY saw most violent single day rally in over 20 years

FX Update: USDJPY saw most violent single day rally in over 20 years

Forex 4 minutes to read
John Hardy

Head of FX Strategy

Summary:  USDJPY ripped above the previous range highs with conviction yesterday, and the vehemence of the move has caught traders unaware. There could be far more upside to come if domestic Japanese investors are losing faith in their currency. Traders should respect the risk that volatility could be set to expand across the board.

Trading interest

  • Long USDJPY with stops south of 110.50 – open target
  • Abandoning EURGBP with stops above 0.8400

The USDJPY move yesterday was an earthquake that deserves our undivided attention and may prove the start gun for a significant expansion of market volatility after so many months of declining market trading ranges and implied volatility in options – to record lows nearly across the board, in the latter case. On Today’s Market Call we quantified the significance of yesterday’s move as the single largest one-day rally in “violence” terms if we measure the 1-day close-to-close move as a multiple of the recent ATR (50-day EMA of that indicator). At 3.4 ATR, this is the largest single largest “real” close-to-close rally adjusted for local volatility conditions in more than 20 years. We say “real” because there were four moves of similar or larger size in the 2010-14 period, but two of these were linked directly to major Bank of Japan meetings in which Kuroda made significant policy announcements, and the other two were Ministry of Finance intervention moves against prior bouts of JPY strength.

What is promoting the JPY decline? We saw Japan printing one of its worst GDP numbers (-6.3% annualized) in Q4, an ugly data point but one that many were willing to write off as linked to the sales tax hike in October as a similar pattern developed over the last major sales tax hike in 2014. But we all have our eyes on risks for this quarter’s numbers on the fallout from the Covid-19 virus and the risk that lingering concerns for travel and activity in general could persist for another quarter or more beyond this quarter and thus through Tokyo Olympics, etc.

As a side note, let us recall that the Bank of Japan has been the world’s most aggressive user of QE and has grown its balance sheet to over 100% of the Japanese economy, injecting plenty of liquidity into the system, but liquidity that  has largely sloshed elsewhere on parlous growth prospects domestically. Looking at a gold-in-JPY chart, we have seen an incredibly aggressive ramping to all time highs that  has only accelerated recently suggesting that Japanese investors may be losing faith in domestic assets and piling into US momentum equities (likely not hedged) and now precious metals and that stimulus measures from Japan will be too weak to matter.

What will this USDJPY move mean? It could mean a further ramping in the US dollar that forces the Fed to cut rates to the bone eventually – let’s recall the 2018 experience in both USDJPY and risk appetite and how that unwound in late 2018 and into early 2019. The question is whether the market finds solace in Fed easing or jolts into a new phase of concern that global growth is on the rocks and the central banks are doing too little too late.

Chart: USDJPY weekly
Yesterday’s USDJPY breakout turned into an incredible move higher, especially relative to recent calm. Technically, the break could not be more forceful, both in terms of the local range, but also on the basis of trend-lines. The next flat-line area of relevance is the 114.50+ area that capped the action since early 2017.

Source: Saxo Group

The G-10 rundown

USD – further USD strength until the Fed responds in sufficient size is the default stance here.

EUR – the euro getting less attention at the moment – most interesting test for the single currency is a chunky and persistent (i.e., more than a single session) risk-off move, which tests the narrative of the currency having become the funding currency of choice for all manner of corporate debt issuance and carry trade shenanigans.

JPY – see above on the JPY, the one currency dominating the market’s attention at the moment – and the EUR comments may also be relevant for the JPY.

GBP – sterling not enjoying this backdrop – GBPUSD has reversed badly and EURGBP is slipping back higher – sterling needs to pick up bids on hopes for a fiscal splash to remain a story.

CHF – EURCHF settling lower – whether historic correlations with risk appetite continue from here (see EUR comments above) our chief interest.

AUD – jobs report overnight seen as weak and Covid-19 news flow not helpful – AUDUSD punching to new cycle lows.

CAD – the CAD resilient on strong equities and ongoing crude oil bounce – but we’re no fans of CAD as Canadian credit cycle set to turn. Watching top of the zone in USDCAD as catalyst.

NZD – following AUD lower with market unwilling to differentiate much for the moment between AUD and NZD.

SEK – reversal zone for EURSEK is 10.60-65 if this recent bearish pattern is set for failure – risk appetite and growth outlook important factors (if both negative, raises risk of reversal higher for test of highs..

NOK – EURNOK pulls back from the brink of 10.00 as market doesn’t like the injection of volatility and weaker risk sentiment this morning – that is the line in the sand if the pair  is to trade lower.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0930 – UK Jan. Retail Sales
  • 1230 – Euro Zone Meeting Minutes
  • 1300 – Poland Central Bank Minutes
  • 1330 – Canada Jan. House Prices
  • 1330 – US Feb. Philly Fed Survey
  • 1330 – US Weekly Initial Jobless Claims

The Saxo 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 is not intended to and does not change or expand on this. 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 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 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 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 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 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-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.