The End Game has arrived
Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
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AUD and JPY just went bump in the night
John Hardy
Head of FX Strategy
Summary: The RBA’s Lowe caved on his former optimism in a speech overnight and we wake up to a crushed Aussie. Elsewhere, the yen also came back overnight, following US Treasury strength and it all feels like a bit of a theme shift toward risk-off.
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).
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).
Chart: EURJPY
Hold on to your seats – it is a two-chart day for the FX Update. EURJPY has been pushed back lower after the probe above the pivotal 125.00+ resistance. This is a disappointment for the bulls and we would suggest that a follow-on JPY rally after the massive late December, early January impulse might be in the offing if the market pivots away from its remarkable confidence that the Fed’s shift in bias is enough to build an ever upward path from here for the economy and financial markets.
Hold on to your seats – it is a two-chart day for the FX Update. EURJPY has been pushed back lower after the probe above the pivotal 125.00+ resistance. This is a disappointment for the bulls and we would suggest that a follow-on JPY rally after the massive late December, early January impulse might be in the offing if the market pivots away from its remarkable confidence that the Fed’s shift in bias is enough to build an ever upward path from here for the economy and financial markets.
The G-10 rundown
USD – the greenback only finding itself in the JPY’s shade as the tone has shifted overnight with the AUD weakness. This will likely deepen if US Treasury yields drop again and risk appetite rolls over (note S&P 500 testing pivotal levels around the 200-day moving average.
EUR – the latest German data have the EU appears recession and eventually existential crisis bound with no clear path to a forceful response save for ECB rearguard actions like TLTRO or a weak re-engagement of QE.
JPY – no surprise to see the decisive pivot in AUDJPY overnight on RBA developments, but we also saw JPY strength more broadly – likely led by the most important coincident indicator for JPY – US treasuries. An extension of the rally there could drive further JPY gains after several JPY crosses reversed overnight.
GBP – sterling back to trading mid-range versus the euro and downside momentum picking up in GBPUSD after the psychologically key 1.3000 fell. Sterling will have a hard time finding friends if risk appetite here and the Brexit path remains murky.
CHF – seeing directional sympathy in EURJPY and EURCHF as both faltered yesterday just after breaking through resistance – a leading sign of softening risk appetite?
AUD – the Aussie eviscerated overnight on the RBA’s change of tone and a steep mark down of the RBA expectations. This could provide the energy to take AUDUSD back below 0.7000 in short order, especially if risk appetite rolls over.
CAD – a flurry of event risks today for CAD with the Bank of Canada’s Lane out speaking, as well as the Ivey PMI and Building Permits data. The oil market rally also looks tired and in danger of rolling over as well, and won’t take much further upside to negate the last leg of downside in USDCAD – let’s say a rally and close above 1.3250.
NZD – is the kiwi the next in line for a mark-down after the Aussie? Interesting test of that notion coming up tonight with the Q4 employment data – though jobs data usually lags other indicators badly. Regardless, given backdrop, market may be excessively sensitive to the least miss in NZ data from here.
SEK – the local trend higher in EURSEK has to be taken at face value until proven false and if Eurozone growth worries accelerate again on the kind of data we saw out of Germany today, SEK could remain weaker even versus a weak euro, especially if broad risk appetite softens.
NOK – if our thesis that a theme shift may be afoot pans out, NOK could go from strength to pronounced weakness and EURNOK may be set for a bear squeeze – certainly less reward for the risk at the moment for EURNOK shorts.
Upcoming Economic Calendar Highlights (all times GMT)
1330 – US Nov. Trade Balance
1330 – Canada Dec. Building Permits
1330 – Canada Bank of Canada’s Lane
1500 – Canada Jan. Ivey PMI
1530 – US Weekly Crude Oil / Product Inventories
1800 – US 10-year Treasury Auction
2020 – Brazil Selic Rate Announcement
2130 – Australia AiG Construction Survey
2145 – New Zealand Q4 Employment Data
USD – the greenback only finding itself in the JPY’s shade as the tone has shifted overnight with the AUD weakness. This will likely deepen if US Treasury yields drop again and risk appetite rolls over (note S&P 500 testing pivotal levels around the 200-day moving average.
EUR – the latest German data have the EU appears recession and eventually existential crisis bound with no clear path to a forceful response save for ECB rearguard actions like TLTRO or a weak re-engagement of QE.
JPY – no surprise to see the decisive pivot in AUDJPY overnight on RBA developments, but we also saw JPY strength more broadly – likely led by the most important coincident indicator for JPY – US treasuries. An extension of the rally there could drive further JPY gains after several JPY crosses reversed overnight.
GBP – sterling back to trading mid-range versus the euro and downside momentum picking up in GBPUSD after the psychologically key 1.3000 fell. Sterling will have a hard time finding friends if risk appetite here and the Brexit path remains murky.
CHF – seeing directional sympathy in EURJPY and EURCHF as both faltered yesterday just after breaking through resistance – a leading sign of softening risk appetite?
AUD – the Aussie eviscerated overnight on the RBA’s change of tone and a steep mark down of the RBA expectations. This could provide the energy to take AUDUSD back below 0.7000 in short order, especially if risk appetite rolls over.
CAD – a flurry of event risks today for CAD with the Bank of Canada’s Lane out speaking, as well as the Ivey PMI and Building Permits data. The oil market rally also looks tired and in danger of rolling over as well, and won’t take much further upside to negate the last leg of downside in USDCAD – let’s say a rally and close above 1.3250.
NZD – is the kiwi the next in line for a mark-down after the Aussie? Interesting test of that notion coming up tonight with the Q4 employment data – though jobs data usually lags other indicators badly. Regardless, given backdrop, market may be excessively sensitive to the least miss in NZ data from here.
SEK – the local trend higher in EURSEK has to be taken at face value until proven false and if Eurozone growth worries accelerate again on the kind of data we saw out of Germany today, SEK could remain weaker even versus a weak euro, especially if broad risk appetite softens.
NOK – if our thesis that a theme shift may be afoot pans out, NOK could go from strength to pronounced weakness and EURNOK may be set for a bear squeeze – certainly less reward for the risk at the moment for EURNOK shorts.
Upcoming Economic Calendar Highlights (all times GMT)
1330 – US Nov. Trade Balance
1330 – Canada Dec. Building Permits
1330 – Canada Bank of Canada’s Lane
1500 – Canada Jan. Ivey PMI
1530 – US Weekly Crude Oil / Product Inventories
1800 – US 10-year Treasury Auction
2020 – Brazil Selic Rate Announcement
2130 – Australia AiG Construction Survey
2145 – New Zealand Q4 Employment Data