FX Update: Yesterday an odd day, a big surprise if it repeats.

Forex 4 minutes to read
John J. Hardy

Chief Macro Strategist

Summary:  Yesterday saw broadly weak risk sentiment and a broadly stronger JPY. No big surprise there, rather the surprise was in the resilience of pro-cyclical currencies versus the US dollar, which was no safe harbor in the storm. Hard to believe that this is some new pattern that will persist, but 2022 will have many moving parts in pressurizing and repressurizing risk sentiment, particularly treasury yields, which are pulling back higher at the long end of the curve today.


FX Trading focus: An odd day yesterday as USD was no safe haven

A strange day in FX-land yesterday, as we saw a classic, broad risk-off move across markets that took US long yields a bit lower, US equities sharply lower (interesting discussion around the big cross-currents in equities, by the way in today’s Saxo Market Call podcast) and the JPY higher. What was not “classic” was the resilience in commodities and the US dollar staying mostly weaker against pro-cyclical currencies and even some EM currencies even if it has bounced back a bit in today’s trade. Not sure where to attribute the odd pattern, but would be surprised to see all of those developments extending. US long yields are back higher today after a somewhat mixed message from US treasury auctions over the last couple of days. The cycle highs in longer US treasury yields are not far away and can quickly dominate the narrative again and dominate the narrative for risky assets.

As we watch the USD’s losses since consolidate today, a bit of extra focus on the 1.1400 area in EURUSD and 0.7250 to as low as 0.7200 in AUDUSD as a failure of these levels to hold will suggest that this week’s USD breakdown after the US CPI release on Wednesday was merely a brief squeeze, signifying little or nothing, save perhaps that Fed forward expectations have to break significantly higher for act as a specific driver USD strength.

Chart: USDCAD
The USDCAD pair has gone far and fast to the downside since the crude oil market recovered swiftly from its December post-omicron breakout nadir and is now interacting with the psychologically significant 1.2500 area that slow happens to also be the 200-day moving average. Coming up next for the two currencies are signals from their respective central banks, with a hawkish raising of the bar from the Fed likely requiring, for example, calling an early end to QE already at the Jan 26 meeting and possibly indicating that “larger than 25 basis point” hike increments are under consideration. Perhaps too early for the latter, if not the former (what does the last few tens of billions of QE matter besides as a symbol). The Fed is priced to hike to about 1.0% through the December meeting, depending on the barometer. The pricing for the Bank of Canada is less reliable, but it is certainly priced to lead the Fed in hiking this year by around two hikes even if the spread for 2-year yields between the two countries has been relatively flat for over a month, so little new has been priced in on a relative basis recently. On that account, the move lower in USDCAD looks a bit over-extended without new signals from respective central banks. Other factors influencing the exchange rate will include whether oil continues to march to new highs or corrects and risk sentiment, where I suspect extended weakness will begin to offer more safe haven support for the US dollar if long US yields are also on the rise.

Source: Saxo Group

In other news, Japan’s five-year JGB’s have managed to break higher to the highest level in about six years, within a hair’s breadth of the 0% level that last traded before Japan implemented its negative yield policy back at the beginning of 2016. I also note that longer JGB’s have also tracked yields elsewhere higher – is the Japanese market making a bet that the new Japanese government is set to take a different approach to stimulus that will raise prices more durably? Adding EURJPY and AUDJPY to my watch list for break down potential (130.00 to start in EURJPY and 82.00-ish in AUDJPY, which have a strong 40-day correlation, respectively, with EURUSD and especially AUDUSD). In the upcoming Q1 outlook, I have pointed out the incredible divergence in the longer term real effective exchange rate of the JPY (weak) relative to the renminbi (strong) that is on a scale resembling the situation in 2015 when China made a dramatic change to its exchange rate regime that weakened the CNY sharply.

Table: FX Board of G10 and CNH trend evolution and strength.
Important to have a look at the relative strength of the broader CNH before judging that it is significant that USDCNH has traded back close to cycle lows – the CNH is back to trading with low beta to USD direction, a familiar regime. Many other themes are still relatively adrift outside of USD weakness and petro-currency relative strength. A big question mark above the sterling move higher – may wear off soon if this is a “the UK seeing the backside of omicron” premium.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
CNHJPY has flipped negative – suspect that is a megatrend for the coming year. Also note AUDJPY close to flipping negative and EURJPY likely not that far behind in coming days if 130.00 falls there. Elsewhere, watching if the USD breakdown holds here.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1330 – US Dec. Retail Sales
  • 1500 – US Jan. Preliminary University of Michigan sentiment

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Chief Investment Strategist

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Chief Investment Strategist

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer

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.