Saxo FX risk barometers are flashing a warning signal

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Risk aversion is not off the table in start to second quarter as coronavirus outbreak continues to destabilize financial markets and the economy. In today's edition, we look at our FX risk barometers to assess the level of risk in the market and we discuss what may be needed to spur risk appetite.


Our favorite FX risk indicator is based on the evolution of Asian currencies (excluding Japanese yen) versus the US dollar. From Q2 2019 till the end of 2019, we have seen a continued improvement of risk appetite in the FX space which has not happened since the end of 2017/early 2018 and was mostly driven by the prospect of US-China trade deal. Since the beginning of 2020, this trend has reversed due to the COVID-19 crisis and our barometer is flashing a warning signal again. In Q1 2020, it was running at minus 4.4% vs +2% in the previous quarter. This is the biggest drop since the Chinese yuan devaluation in 2015 and a more important quarterly decrease than in the Global Financial Crisis.

The coming months will certainly be even more challenging as investors will need to cope with a continued flow of bad statistics and as lockdown measures will remain in effect for a prolonged period of time (up to June in the United States according to some simulations). The best way to assess the level of risk in the forthcoming days and weeks is to observe AUDJPY – the ultimate barometer of risk on / risk off. Back in 2008 when Lehman wasn’t rescued, the AUDJPY cross collapsed from 105.00 to 55.00 in less than four months. The scale of the depreciation is far more limited now (minus 14% since January) but the cross is already back to GFC levels. After a short-lived bounce at the end of March, the cross has entered into a bearish trend again. The formation of an inverted head-and-shoulders pattern confirms that bears are still in control and that more losses are about to come in the medium term. It is probable the AUDJPY cross will go all the way down to 60. This is a clear signal that risk aversion will stay elevated for the time being.

For more charts, see our MacroChartmania.

Basically, a real improvement in risk appetite is unlikely until some of these combo materialize: RoW growth rate for COVID-19 cases slows, oil price rebounds or funding/liquidity stress significantly decreases (see our G7 Policy Tracker to follow the latest Fed’s monetary policy tweaks to facilitate access to USD funding).

Important note: The March Employment Report that is due today at 12:30 GMT is the most useless number released this week. Due to methodology (the Labor Department’s surveys took place during the week that contains the 12th day of the month), it is unlikely to show labor market disruption related to the COVID-19 outbreak. Investors will need to wait for the April Employment Report to be released on May 8 to assess the real impact.

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 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 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-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract) and Type 3 Regulated Activity (Leveraged foreign exchange trading) licenses (CE No. AVD061). Registered address: Rooms 2001-02, 20/F York House, The Landmark, 15 Queen's Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

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

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.