FX Update: The JPY finally doing what it is supposed to do.

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  The JPY volatility beast is finally reawakening after capitulation-style selling in equity markets last week saw resistance levels falling across the board for the JPY. A melt-down in oil prices is punishing everything oil-linked in FX, including RUB, CAD and NOK as EURNOK trades to a new record high.

Trading interest

  • Taking profit in USDCAD ahead of the weekend (1.3450-ish as of this writing)
  • Long (Expiry Nov 6 – days after election) 1.1200 EURUSD calls
  • Short USDJPY, moving stop down to breakeven (above 110.20) for 106.00 target

Yesterday saw the market mounting a valiant effort to stabilize as S&P futures managed a punchy almost 3% rally in early trading in the US yesterday. But later in the session, the selling resumed with vigour and continued overnight to new lows for the cycle. In FX, the most  noteworthy coincident development was the massive USDJPY move lower that we discuss further below.

I don’t want to overattribute the price action to specific stories, but markets may have been spooked by concerns in the US that the coronavirus has leaked out into the broader population after a whistleblower reported concerns about health workers and other people in contact with coronavirus victims from the doomed Diamond Princess cruise ship being allowed to simply go back into the community without further monitoring (among other concerns). The US is the world’s consumer and any shutdown of activity on any level even approaching the scale of what Japan has done (closing all schools and colleges for a month) would dent market confidence further.

Have a listen to today’s Market Call podcast, we discuss the capitulation in equity markets and oil and discuss the growing risk – probably 100% of some attempt from the Fed to shore up confidence – even seeing credible commentators arguing for something today or before the Monday opening. I’m not sure that the market would take a Fed cut, or even a coordinated rate cut, for example, as a massive confidence booster (for the imminent Fed cut argument, have a look at the latest MacroTourist piece,  who cites Kevin Warsh, a former Fed official who argues it is time for a rate cut.). Rate cuts aren’t the medicine for this environment – massive stimulus to limit credit events are one approach – but this is too complicated to move on from one day to the next. A rate cut doesn’t address what ails an economy at risk of widespread shutdowns on coronavirus concerns. But it doesn’t mean they won’t try and the odds of a strong attempt at guidance are rapidly approaching 100%, whether from the Fed, or from Trump declaring a national emergency (only partially kidding) because equity markets are down. Once an attempt at guidance arrives, we get a true test of market sentiment and whether traditional central bank medicine can boost cratering sentiment.

USDJPY finally punched lower as equity markets melted lower yesterday and gold failed to provide its safe haven role on the day. (it only took a couple of days, but the ability to stay above 110.00 looked impressive to us over the prior couple of days, given the scale of carnage in asset markets that would normally have sparked far greater JPY volatility in past market regimes.) The move has thoroughly reversed the price action – look at a weekly candle chart! – and points much lower still now, especially if Trump empowers Mnuchin to sell USD at some point. But the speculative market may be able to manage at least 105.00 or so on its own, given this break.

Source: Saxo Group

Today’s G-10 rundown

USD – at the moment, the USD is an inferior safe haven to the EUR and JPY (see CHF comments below) and a safe haven in the USD/EM perspective. With the USDJPY move well through 110.00 there may not be much to hold the pair up.

EUR – the euro move continues and EURUSD may not find meaningful resistance until at least 1.1200 if the negative market energy continues. Regardless, the EURUSD chart has turned and the chief question for bulls now will be the magnitude of any backfills lower if any relief rally in risk appetite appears, for example on a surprise Fed move or other.

JPY – the JPY catching up to its normal behavior finally, and this move may accelerate now that  USDJPY has capitulated through support – JPY crosses will trade with their usual high beta to risk appetite.

GBP – sterling taking a drubbing versus the hard charging EUR and especially JPY, but fairly steady versus the USD – GBPUSD looks more interesting for a speculative stab at an eventual GBP recovery, but we may be too early on this.

CHF – we don’t really care much about CHF at the moment, as the currency has crumpled versus the JPY onslaught and EURCHF even posted a solid rally from yesterday’s lows.

AUD – the Aussie set for another test over the RBA next Tuesday, which the market is somehow still pricing for low odds of a rate cut. At some point, the move is overdone, but we’re reluctant to call that point in this environment.

CAD – a chunky and well-deserved CAD sell off and there could be far more downside to come – watching the late 2018 cycle top above 1.3600 next on this move higher in USDCAD.

NZD – the kiwi catching up to the downside as the market readies for RBNZ cuts to come (short NZ yields have collapsed far more quickly than those for AU over the last week). NZDUSD looking at the last shreds of the range this morning and could be set for a test below 0.6000

SEK – the background pressure from weak risk appetite and the concern for the economic outlook on this coronavirus spread seeing EURSEK capitulating up above the 10.60-65 zone, opening up an attempt at the cycle top and possibly beyond if the situation continues to worsen.

NOK - EURNOK has ripped to new all time highs and there is no ceiling that we can identify as long as oil prices continue lower.

Upcoming Economic Calendar Highlights (all times GMT)

  • 1300 – Germany Feb. Flash CPI
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  • 1415 – US Fed’s Bullard (Non-voter) to Speak
  • 1445 – US Feb. Chicago PMI
  • 1500 – US Feb. Final University of Michigan PMI

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