FX Update: What is needed for volatility to return? FX Update: What is needed for volatility to return? FX Update: What is needed for volatility to return?

FX Update: What is needed for volatility to return?

John Hardy

Head of FX Strategy

Summary:  Risk sentiment has been on the defensive over the last week, though this hasn’t done much for the US dollar as market fear levels remain very low energy. The greenback awaits incoming data, especially Friday’s PCE inflation data, though the June Consumer Confidence survey is up today. Despite a lack of pointed move in global yields, the Japanese yen has scraped to new lows here for the local cycle against the US dollar, euro and others.

Today's Saxo Market Call podcast

FX Trading focus:

  • JPY scrapes to new low as fear levels remain subdued
  • US dollar awaits incoming data – what to watch for in today’s Consumer Confidence survey
  • Is sterling showing signs of vulnerability.

Despite a lack of significant sovereign bond market volatility, the JPY has scraped to new lows for the cycle again today, although new USDJPY highs just ahead of 144.00 failed to stick, while EURJPY managed to clear 157.00 for the first time since 2008. We can argue all we want that the move is looking a bit stretched, given that key long yields elsewhere are not trading at new cycle highs and the 10-year JGB “cap” of 0.50% isn’t even under pressure in Japan, with 10-year JGB’s currently yielding only 37 basis points.

The past week has seen a solid downdraft in risk sentiment, as measured by global equities, at least. At the same time, “fear gauges” like the VIX suggest that equity traders are taking the mark-down very much in stride after the prior strong rally. In FX, implied volatilities have picked up ever so slightly, though the 1-month Deutsche Bank implied volatility measure sits near 7.0% today, the lowest since February of 2022, just before the Fed achieved lift-off with its hiking cycle. JPY volatility is a slightly different story, with USDJPY 3-month implied picking up from below 9% mid-month to just over 10% today. That 3-month tenor does capture the next two FOMC and BoJ meetings, it should be noted.

Given that markets are complacent on recession risks and that the forward central bank expectations curve is for perhaps just one more Fed hike followed by a series of cuts starting sometime next year as inflation is expected to weaken significantly, it is hard for the market to drum up volatility. A reheating of volatility would likely require either a) for bad news to materialize quickly in the form of incoming data, and for it to play as sufficiently bad to actual merit a bad news reaction function or b) for a reheating of the economy to become more evident and lift commodity prices and forward inflation concerns. Today does see the June Consumer Confidence survey. On watch there is whether the Present Situation comes unglued from its very elevated and stable levels of the last 7 months above 145. That part of the survey is correlated with the strength of the labor market and would likely need to drop considerably to suggest we are entering into a recession window. The expectations component meanwhile, is at the low end of the range of the last 10 years, but has stabilized in recent months as well, still solidly above the panic last summer on the spike in gasoline prices.

Sterling showing signs of vulnerability?
Sterling is looking a bit tired, particularly in light of the further advance in UK yields to new cycle highs (2-year Gilt posting 5.2% today, with BoE priced to peak above 6.00% this year). It’s a bad look for a currency that can’t find more support from a more hawkish central bank, likely because the UK inflation is seen as a structural issue that will hamper growth, tying the fiscal authorities’ hands behind their back if inflation is to be avoided. Fears of tight fiscal, in other words, risk offsetting the pricing of tighter monetary policy.  A smaller economy is the only viable path to less inflation when the supply side is the limiting factor. The 2-year German Schatz-UK Gilt spread has plunged to new cycle lows in the last few days – currently at -209 basis points versus around -100 bps in late April. The flattening out of EURGBP despite the relative rise in BoE hike expectations suggests some sterling vulnerability. It’s a bit of a wait for the next UK data of note, payrolls/claims/earnings data for June, don’t arrive until the week after next.

GBPUSD has yet to show its hand after peaking just above 1.2800 and then rejecting a second attempt at that level over last week’s Bank of England meeting, a move that was rejected. Technically, the first real sign of weakness would be a fall back through the old resistance area around 1.2650+, but bears need a fuller rejection of the latest rally wave to argue that at top is in, and that would require the pair to punch back down through perhaps the 61.8% retracement of that wave, which is just above 1.2500. Soft US data that encourages lower US yields and a fresh wave of strong risk appetite (or at minimum, no significant risk-off) are likely needed to engineer a bull-trend confirming rally and close back above 1.2800. on that note, watching today’s US confidence and especially Friday’s PCE inflation data, with the data calendar for the US picking up next week.

Source: Saxo

Table: FX Board of G10 and CNH trend evolution and strength.
China checked the decline in the yuan overnight, but the impact was rather limited, with AUD getting very little from the move after a nudge higher overnight. Australia’s May CPI report is up tonight. Coming up just after this report goes live is the Canadian CPI, a test for the very strong CAD of late.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
The AUDUSD chart status looks pivotal here, not decisively negative just yet despite our trending indicator nudging into negative territory yesterday. AUD pairs face a test with the CPI release tonight. EURGBP trend status will be interesting to track in coming days, although most trends there in recent years have been of short duration.

Source: Bloomberg and Saxo Group
Upcoming Economic Calendar Highlights (all times GMT)
  • 1230 – Canada May CPI
  • 1230 – US May Durable Goods Orders
  • 1300 – US Apr. S&P CoreLogic Home Price Index
  • 1400 – US May New Home Sales
  • 1400 – US Jun. Consumer Confidence
  • 1400 – US Jun. Richmond Fed Manufacturing Index
  • 1700 – US Treasury auctions 5-year notes
  • 0130 – Australia May CPI

Quarterly Outlook 2024 Q2

2024: The wasted year

01 / 07

  • Macro: It’s all about elections and keeping status quo

    Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.

    Read article
  • FX: The rate cut race shifts into high gear

    As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.

    Read article
  • FX: High yielding currencies will start losing their appeal

    Uncover the shifting focus in 2024's FX markets towards growth resilience and relativity, away from bond yields and inflation stories.

    Read article
  • Commodities: Year of the metals

    Embrace the metal revolution on the commodity market in the coming year, with a focus on gold, silver, platinum, copper, and aluminum.

    Read article
  • Macro: What happened to the future?

    The gloominess of geopolitical conflicts and the repetitive nature of political agendas. What else does 2024 hold in store for us?

    Read article
  • The rise of populism: Far-right parties will influence the future

    The disheartening cycle of unresolved geopolitical conflicts, the rise of polarizing political parties, and the stagnation of productivity.

    Read article
  • Investing in China: Navigating Q1 amid economic challenges

    Understand China's political landscape in Q4 2023 and the impact on counter-cyclical initiatives, with a focus on the pivotal Q1 2024.

    Read article

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.