Markets nearing the full melt-up scenario tipping point Markets nearing the full melt-up scenario tipping point Markets nearing the full melt-up scenario tipping point

Markets nearing the full melt-up scenario tipping point

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Risk conditions have shifted to the most aggressively risk-on in months and major markets are now perched at a tipping point at which the current melt-up either begins to fade or accelerates.

This situation arises after risk appetite melted higher into the Friday close, boosted by China’s latest credit data and Trump’s full court political pressure on Fed policy. Last week’s price action was a microcosm of the back and forth churning of the price action we have seen for many months as traders can’t decide what to do with the US dollar and risky currencies. The backdrop for risk-taking couldn’t be more supportive, as our Global Risk indicator is at its most positive level since just before the early 2018 meltdown.

To take an example, AUDUSD changed directions every day from Tuesday through Friday last week and is now perched just below the 200-day moving average, just as the US equity market is now less than two percent from its all-time highs again and long US treasury yields are perched at pivotal levels (10-year just above 2.50% and the 30-year just below 3.0%).

The JPY has been a bit more consistently weak, especially since early Friday, when China’s March credit data pointed to a full tilt effort to continue stimulating the economy.

The chief question is how aggressively the ongoing rally in risk sentiment can extend if yields begin rising again – particularly at the long end of the US yield curve.  After all, aggressive moves higher in US yields preceded the major setbacks in 2018 as we note in the chart below. The ability of yields to progress higher even as risk appetite continues to melt-up would be a sign of a more durable “melt-up scenario” risk rally, one built on the hopes that China’s stimulus and the shift to a more dovish stance by global central banks will support a bounce in financial markets, though one that eventually will need confirmation in the economic outlook.

It is a bit early in the game for the rising yield question, because for the moment we are merely looking at a technical reversal of the falling rates regime if the US 10-year benchmark yield punches higher – but it is still a significant hurdle for the market and likely no coincidence that this key test for US yields arrives as major US indices have now rise to within two percent of their all-time highs from last fall – just ahead of earnings season. Also just ahead are the risk that US consumers are disappointed with their tax refunds and the seasonally weakest period for equities (Sell in May and go away). We’re a bit unwilling to call whether the melt-up scenario fully engages, but we’ll use another leg higher in long US yields as the key coincident indicator. 

For currencies, an extension of the risk melt-up would likely coincide with a weaker Japanese yen, an almost as weak US dollar, and a stronger euro, the latter driven by hopes that China’s stimulus will benefit the export-driven motor of the Eurozone economy. Commodity-linked and EM currencies (RUB, ZAR, MXN) should also do well in this scenario, though the most China-linked Asian exporters may not see significant participation if China decides to allow the CNY to track a weaker USD lower.

Chart: US 10-year benchmark

Note that the two big sell-off episodes in risk appetite coincided with long US yields rising to new highs for the cycle. The first was in early 2018 when the US 10-year benchmark finally rose above the 2.50+% yield highs from late 2016. The second was the rise above the multi-year 3.10+% highs in early October last year. Note the local resistance at 2.50+% again.
Source: Bloomberg
The G10 rundown

USD – as noted above, the US dollar outlook bound up with the global risk sentiment outlook. Worth noting that the short end of the US yield curve has backed up as well, pricing out some of the easing predicted previously, despite Trump’s campaign for rate cuts.

EUR – the euro looks well positioned for further strength if the market sees China’s stimulus helping to rekindle the Euro Zone export engine - still some way to the major test for EURUSD up at 1.1500. Watch the German ZEW survey up tomorrow and the flash April PMIs on Thursday as the next key EU data points.

JPY – the yen stands to lose the most if the melt-up scenario fully engages as the JPY carry trade re-engages. Note the gauntlet has already been laid down for JPY crosses as especially AUDJPY bulled higher to close above major resistance on Friday.

GBP – our overriding concern is that  the  long Brexit delay will do sterling no favours. A close above 0.8700 in EURGBP and/or below 1.3000 in GBPUSD could set something in motion.

CHF – EURCHF has fully reversed back higher away from the major 1.1200 area with the clearing  of the No Deal Brexit risk and widespread complacency helping the franc lower. Likely to continue to trade weaker if the melt-up scenario fully engages.

AUD – a risk melt-up scenario would be AUD supportive, but some caution now that the election has been called for May 18 and Labour is leading in the polls, as the election is seen to a degree as a referendum on environmental policy (potentially AUD negative if seen as eventually more strict).

CAD – the latest CPI and Retail Sales data up from Canada on Wednesday and Thursday, respectively. USDCAD price action has proven impossibly indeterminate – really need above 1.3450 or below 1.3200 to merit much comment.

NZD – AUDNZD may be overdone short term to the upside, but still like the idea that we have seen a structural low there. As for NZDUSD, the pair looks likely to provide high beta to any failure of the melt-up scenario to engage, given how little NZD has responded to a supportive backdrop (likely down to AUDNZD bounce and a dovish RBNZ).

SEK – if the  market likes the prospects for the Euro Zone economy on China stimulus, then the cheaply valued SEK is an even greater bargain. At least, we need to technical traction lower in EURSEK to drive any temptation to trade SEK on the long side.

NOK – EURNOK stalling after probing new lows and the direction here likely linked to the melt-up scenario pivot or non-pivot. What has given constant pause for a more aggressive call higher for NOK is the fact that we haven’t seen a more notable bid already, given the massive support for NOK from the energy markets and anticipation of Norges Bank tightening. 

Upcoming Economic Calendar Highlights (all times GMT)

1230 – US Apr. Empire Manufacturing
1300 – Canada Mar. Existing Home Sales
1430 – Canada Bank of Canada Q1 Overall Business Outlook/Senior Loan Officer Survey
1700 – US Fed’s Evans (FOMC voter) to speak

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 (
- Full 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

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.