AUD and JPY just went bump in the night

We wake up this morning to dislocated AUD charts. In a speech overnight, the Reserve Bank of Australia’s Lowe explicitly indicated that the central bank is shifting into a neutral bias: “Over the past year, the next-move-is-up scenarios were more likely than the next-move-is-down scenarios. Today, the probabilities appear to be more evenly balanced.” 

Lowe was also a bit more explicit in raising downside risks: “…it is possible that the economy is softer than we expect, and that income and consumption growth disappoint ... lower interest rates might be appropriate.” This is not dramatic stuff, but Australia bond traders took the information and ran with it, sharply marking up the odds for a rate cut. AUDUSD looks thoroughly reversed for a look at the cycle lows – see more below.

The euro was soft again this morning as Germany sounded another weak note in its latest Factory Orders print for December, with a -1.6% month-on-month drop and the worst drop in year-on-year data since 2009. We are looking for ways to trade euro from the short side – with the outlook very different if risk appetite is about to turn over (favours EURUSD and especially EURJPY downside more than something like EURAUD and EURCAD downside.

The chunky auction of US three-year treasuries yesterday went off without a hitch and US yields may be a leading indicator on the risk of a fresh rollover in risk appetite, with the last two sessions of strength in the US Treasuries market at odds with the ongoing melt-up in risk appetite – one of those signals is wrong and strength in treasuries arguably materialised before the full-fledged weakness in equities became evident last fall. 

This has huge implications for the focus in currencies, as the recent EM rally would be most exposed to a correction if market complacency fades again, followed by the commodity dollars and leading to a stronger USD and JPY. We have an auction of 10-year Treasuries late today.

Trump’s State Of The Union address had no real impact as we all await the outcome of eventual meetings with Xi and Kim Jong Un and whether China is willing to signal its willingness to make the “structural changes” that Trump claims are necessary for any deal.

Trading interest today

Maintaining AUDUSD short exposure – (originally traded through options, will begin to reduce exposure between 0.7100 and 0.7000.)

Abandoning USDJPY upside exposure – market focus has shifted and break above

Maintaining EURUSD downside exposure for minimum 1.1300 but looking to retain exposure for downside break

New interest in EURJPY short at around 124.75 with stop above 125.70

Short AUDCAD for 0.9200 (some volatility risk around CAD event risks today)

Chart: AUDUSD

Happy to look again at the AUDUSD chart as the sell-off has inflicted significant damage to the chart with the deep plunge below 0.7200 again. This likely sets up a test of the lows for the cycle (we start with 0.7000 – not the spike low from the JPY cross flash crash collateral damage), barring a crazy extension of the already wild rally in iron ore and/or some far more profound trade deal outcome than we think is the likelier scenario (a weak deal more likely than no deal, but aggregate odds outweigh the likelihood of a comprehensively positive deal).