FX Update: Whiplash for USD traders, JPY remains in dumps. FX Update: Whiplash for USD traders, JPY remains in dumps. FX Update: Whiplash for USD traders, JPY remains in dumps.

FX Update: Whiplash for USD traders, JPY remains in dumps.

John Hardy

Head of FX Strategy

Summary:  We have seen some wild swings in risk sentiment in recent days, with the USD first jerked one way and then the other, all while the JPY continues to fall broadly and set new lows versus even a shaky US dollar today as it appears Bank of Japan governor is willing to go down with the YCC ship and longer US treasury yields remain pinned near the cycle highs. Elsewhere interesting relative moves in Aussie and kiwi overnight on dovish RBA minutes and a hot NZ CPI print.

FX Trading focus: Whiplash for USD traders, JPY continues plunge.

Yesterday saw a bizarre melt-up in risk sentiment that took the USD down a few notches. There was no readily identifiable trigger for the sentiment shift yesterday, which could be related to heavy derivatives exposure and stretched sentiment. Even for the relatively near term, it is hard to see a meaningful USD turnaround without anticipation that the Fed is set to ease up on its tightening message, with the chicken-and-egg dilemma that it will likely only do so once employment indicators (badly lagging) are headed clearly south.

A considerable portion of the USD weakness yesterday was against sterling, with GBPUSD managing to back all the way up above 1.1400 in late trading. Sterling even made a bid at breaking through pivotal levels in EURGBP, although that move has been corralled for now (low near 0.8575 – trading well above 0.8700 as of this writing). It is interesting to see headlines attributing the latest sterling surge to FT sources indicating that the Bank of England will delay any attempt to do QT for now (The BoE pushed back against that story this morning). Sure, the recent sterling recovery was achieved as the new UK Chancellor reversed most of Truss’ budget-busting initiatives, and on the Bank of England bringing emergency liquidity and indicating it would be will to hike as much as necessary to stabilize markets at the next meeting. When you ease the liquidity crisis in the proverbial burning theater, sterling can stabilize. Stabilization will not necessarily lead to a strong new rally. As for the QT, it would be a sign of ongoing fragility if the BoE was to fail to carry out any QT for now, not a source of sterling strength. We may have seen the top in GBPUSD here unless this strange melt-up in risk sentiment extends.

Elsewhere, interesting to note that despite a weak US dollar yesterday and into this morning, the Japanese yen remains resolutely weak, with new highs in JPY crosses and even USDJPY again today (although possible signs of intervention as I am writing today’s report – more in the chart discussion below). Bank of Japan governor Kuroda remains unmoved, arguing for no change in policy once again overnight and saying that inflation would eventually fall back even if currency weakness risked aggravating inflation levels and telling a lawmaker who asked that he resign that he has no plans of quitting. Have to believe the next round of intervention may be coming up soon for JPY crosses, but speculators may be smelling blood after the prior round failed to impress beyond a few hours, as noted below.

In posting a USDJPY chart today, I was originally going to ask whether intervention is on the way, given we were posting new highs in USDJPY this morning and nearing the 150.00 level. Then, what might be intervention or what might be a nervy market over-reacting to large transactions materialized suddenly, with all JPY crosses dipping suddenly and violently, only to recover much of the lost ground within minutes. Official intervention would more likely have driven a larger move. Let’s recall what happened the last time the BoJ intervened a few weeks ago, when USDJPY challenged above the important 145.00 area resistance at the time: an initial low was posted within an hour just below 141.00 and then a few hours later that low was slightly exceeded before the rebound back to more or less unchanged within two days. Working against the intervention efforts was a fresh rise in global bond yields at the time – a factor that will continue to overwhelm any intervention efforts as long as long yields stay here or run higher still. But safe to say that the threat of official intervention makes tactical trading a risky business.

Source: Saxo Group

An interesting session overnight for AUDNZD as the RBA minutes highlighted concerns that the steep pace of rate tightening in this cycle will heavily impact the Australian consumer, particularly as floating rate mortgages reset in the months ahead. In New Zealand, the release of the much hotter than expected Q3 CPI data jolted RBNZ rate expectations sharply higher, with solid odds now for the first 75 basis point move for the cycle from the RBNZ next month. AUDNZD pounded lower overnight, trading well below 1.1100 at times, but I wonder how much more the market can get out of this correction. I still see the relative current account trajectory as an important factor – will look for support to come in soon as the rate spread likely can’t get much more stretched in the kiwi’s favour and shouldn’t matter that much in the mix anyway.

Table: FX Board of G10 and CNH trend evolution and strength.
Awaiting the USD status again after this latest sell-off as the secular rally remains intact – would have to see above 0.9900 and even parity in EURUSD and USD weakness elsewhere to suggest a larger scale consolidation afoot. Note the CNH level in USDCNH terms as the action remains pinned in the 7.20+ area there and USDJPY applies further pressure to USD/Asia.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Interesting to see if GBP rolls over now to weakness in GBPCHF, EURGBP and GBPUSD terms. GBPUSD just flipped to positive as of yesterday’s close, but hasn’t broken above 1.1500 resistance – the chart is neutral within this range and tilts more negative back below 1.1000 again. Elsewhere, NOKSEK could be set for a challenge lower after an interesting sell-off today – trend is neutral and awaiting new momentum.

Source: Bloomberg and Saxo Group

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