FX Update: Eyeing USDJPY status as FX too quiet

Trading interest

• Long USDCAD for 1.3500+, stops below 1.3220
• Long (Nov 6 – days after election) 1.1200 EURUSD calls

The broader market is finally beginning to take the coronavirus outbreak more seriously, as yesterday’s brutal sell-off in equities, one of the largest in years, depending on the geography, washed over markets in the wake of stories showing widening contagion of the virus in Japan, South Korea and Italy. The most concerning stories I came across this morning were the FT story on the outbreak in Japan, recent statements from the Imperial College of London (actually available as far back as Friday in their official report on the risk that some two-thirds of virus cases are undetected, and Iran’s unfolding outbreak.

As we discussed in today’s Market Call podcast, the “Turnaround Tuesday” narrative and buy-the-dip mentality were in full swing this morning after yesterday’s carnage, but we remain far from sanguine on the risk of further fallout. The difficulty for the FX trader is that the feed-through into FX has been so muted, save for individual EM cases – note the ruble yesterday, in particular. Below we look at USDJPY and whether the pair reverses hard back through 110.00, as a volatile JPY to this old trader feels like a prerequisite for FX to play a bit more catchup with the volatility impacting other asset classes.

Interesting to watch the Hungarian forint (HUF) over today’s Hungarian Central Bank meeting, as the bank has promised a policy review with the results set for discussion in March. Meanwhile, the bank has been tightening liquidity, evident in a sharp rise in HUF 2-year swap rates have spiked from  below 50 basis points to north of 100 basis points over the last week in the wake of the January CPI release showing a 4.7% rise in prices. HUF only posted a modest consolidation on the tightening liquidity and it is clear that the central bank will need to make like the Czech central bank in responding to incredibly negative real rates with a rate hike regime or risk aggravated currency weakness.

Chart: USDJPY
We continue to watch USDJPY with interest if this sell-off in risky assets continues after last week’s spike higher may prove in hindsight to have been an aberration linked to the “unstoppable” rise in US tech stocks to new all time highs despite signs of concern elsewhere – a story that by yesterday’s market closed has reversed rather hard, to say the least, along with the USDJPY price action, though the reversal there has not yet taken out the important 110.00 area – need a close below there to signal that this chart is turning more forcefully lower.