Head of FX Strategy
Summary: The recent reversal in USDJPY looked like a classic trading setup for bears, but the subsequent rise in safe haven yields since the FOMC meeting last week is boosting the pair again and threatening a reversal of the reversal. The currency market showing little energy, but interesting to note the USD resilience here and that the latest trading headlines may point to diminishing returns.
The low volatility environment persists as yesterday saw risk sentiment continuing to improve, though without as much bearish price action for the US dollar, an interesting disconnect that we’ll have to monitor, though the signal too weak at this stage to merit much attention. The only consistent behaviour is in the Japanese yen, which remains soft with every fresh downtick in global safe haven bonds (and rise in yields). More on USDJPY in the chart below, but generally, currencies are generally in a passive mood, absorbing intermarket developments.
In yesterday’s chart highlights, we noted that NZDUSD was threatening above a critical area, but so far showed signs of rejecting the attempt higher and interesting to see that the Antipodeans (AUD and NZD) didn’t get much out of the latest US-China trade deal noise, in which the US side is said to be considering dropping existing tariffs on more than $100 billion of Chinese imports. Specifically for NZ, note that the country reports its Q3 employment and wages data tonight.
The RBA left rates unchanged as universally expected overnight, and in its latest statement expressed the hope that lower rates will re-invigorate the property bubble (not the RBA’s words, which were: “The low level of interest rates, recent tax cuts, ongoing spending on infrastructure, the upswing in housing prices in some markets and a brighter outlook for the resources sector should all support growth.”). The rather long statement is an expression of hope that things will return to normal, but Australia’s debt saturated economy is not likely to experience any profound recovery, and the low rates may bring stabilization to property markets, but won’t restart the bubble. The Markit Services PMI for Australia has been scraping along around 49-52 over the last many months and was out at 50.1 overnight after a bump in September. In short, while the RBA has flagged that it is unwilling to consider negative interest rate policy, it is on path for at least another cut and possibly two while joining the global call for fiscal stimulus on further economic weakness.
In her first speech late yesterday, ECB president Lagarde avoided monetary policy comments as she stood before a German audience at an award ceremony for former German finance minister Wolfgang Schaeuble. It wasn’t the venue for saying anything of note – which she thoroughly avoided doing. Schaeuble was a consistent voice against bailouts and exposing the German balance sheet in the approach to dealing with the EU debt crisis back in 2010-12, even as it was German savings getting recycled through the periphery and blowing up asset bubbles there that sparked much of the crisis in the first place.
Chart: USDJPY
USDJPY continues to offer currency traders a proxy for trading the US treasury market, as the latest weakness in US treasuries is seeing the key yield benchmarks re-approach their recent highs. An important psychological level for yields if we do continue to see weakness in treasuries is the 2.00% level (current yield near 1.80% vs. the 1.90% high from September), with USDJPY probably pulling above recent highs and challenging 110.00 if we’re set for a further melt-up in risk sentiment that weighs on safe haven bonds.
The G-10 rundown
USD – the greenback putting on a show of resilience despite the ongoing risk appetite semi-meltup – an interesting divergence with recent behaviour that bears monitoring over coming sessions.
EUR - EURUSD bulls hoping for a breakout and wanting to celebrate the positive headlines on US and the Europe likely avoiding any showdown over auto tariffs for the moment have instead seen the pair drifting back lower – if we head back below 1.1100, the outlook turns increasingly neutral tactically.
JPY – the yen a proxy for global safe haven bonds here and likely to remain that way, with all eyes on the US long end and the 2.00% level for the 10-year benchmark.
GBP – election uncertainties are preventing directional moves in sterling for now and keeping implied volatility from falling further, with the 3-month implied still around 10%. Interesting to see how the consumer is holding out in today’s UK Services PMI as the UK credit impulse has collapsed for several quarters.
CHF – not getting a signal from the franc.
AUD – the RBA not surprising in any way and the market is priced for a pause here. Most interesting from here is whether the coming US-China trade deal has already been priced in, on the assumption we’ll only see a symbolic phase one deal with few implications for global growth.
CAD – CAD longs still licking their wounds from the dovish caution expressed by the BoC last week – 1.3200 beginning to look like an important upside pivot in USDCAD if the lay of the land shifts in favour of the USD. Energy prices doing all they can to support CAD in the background.
NZD – important employment data tonight for NZD traders – particularly given the pivotal area in NZDUSD around 0.6425 explored yesterday and important for the relative strength battle in the very choppy AUDNZD cross.
SEK – the backdrop and steep backup in Swedish short yields supportive of a EURSEK breakdown- but seeing is believing. Meanwhile, we are concerned about the trajectory of the Swedish economy as it dips into recession – the latest Services PMI survey and other noise out of Sweden today up this morning as noted in calendar highlights below.
NOK – crude oil prices and strong risk sentiment are supporting NOK in the background and we have a very nice symmetrical rejection in EURNOK of the prior rally wave, but need to punch down through 10.05-10.00 from here to suggest the lows are in for the krone.
Upcoming Economic Calendar Highlights (all times GMT)
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
