Dollar aimless ahead of FOMC

FX Update: Spotlight on JPY crosses and EURNOK

Forex 4 minutes to read

John Hardy

Head of FX Strategy

Summary:  While markets await the Fed Chair Powell speech today it is worth having a look around the edges of the G10 for other themes outside the inevitable USD focus in coming hours and days. On that note, we consider interesting developments in JPY crosses that will lie ahead as the safe haven bond market volatility has come alive in fits and starts over the last two weeks and have a look at EURNOK, which traded down near key support this morning.


Trading focus:

USD reaction over and on the other side of Fed Chair Powell speech: already covered this week, particularly in yesterday’s FX Update. We’ll update our impressions of the action on the other side of the speech in tomorrow’s update.

JPY crosses – an interesting development of note in recent sessions has been the Japanese yen’s sympathetic gyrations with the increased volatility in safe-haven bond markets, which will inevitably take their signal from Fed Chair Powell’s speech today as well. (The JPY often moves in positive correlation with bond prices, negative correlation with yields) Since the trough of the market crisis back in March, the lower safe haven yields, strong rebound in risk appetite and the commodity price rebound have driven a reflationary narrative that have generally sunk the JPY. The Powell speech event risk could have profound consequences for the market’s confidence in its underlying narrative for the better or the worse, and the implications for the JPY could easily be as affected as for the US dollar. If the Powell speech proves a “sell the narrative” moment and yields back down and risk appetite goes negative, we would likely see a JPY lurch to the upside – with EURJPY the JPY cross closest to approaching interesting downside pivot levels as we look at below. If the market is impressed with Powell’s Average Inflation Targeting (AIT) argument and yields rip higher as bonds sell off (under the assumption that any eventual yield cap policy only comes much farther down the road), the JPY could fall sharply again. Stay tuned, the JPY volatility could match or exceed that for the US dollar today and tomorrow.

Chart: EURJPY
EURJPY has come under some pressure in fits and starts over the last two weeks of trading and we eye the 124.00-50 area in the wake of today’s Powell speech, with further downside potential quite large if the market at least temporarily waxes cautious again on the outlook and bids back up safe haven bonds in the wake of the speech after a recent sell-off that had generally taken the JPY to new lows basket-wise versus the other G-10 currencies. Either way, the speech is a test of the narrative since the market trough and commodity recovery that took place in late March into early April and drove the JPY weaker over that time frame (such that AUDJPY just scraped a new cycle high ahead of Powell’s speech today).

Source: Saxo Group

EURNOK – as we await the impact of the Fed Chair Powell speech later today, we also keep an eye on EURNOK, which has once again been pressing down on an interesting chart area below 10.50 this morning, having since backed up slightly. Factors supporting the NOK include a country that has suffered less of a growth hit to its GDP at -5.1% QoQ, relative to any other European economy in the same quarter. As well, this crisis won’t touch Norway’s sovereign balance sheet, as all of the significant deficit spending the government is doing to stimulate will be funded by unloading assets from the country’s pension fund, so unlike the central bank QE required by other countries for governments to fund themselves.  NOK is still cheap in long term valuation terms and could be set for an additional rally if sentiment in Europe continues to improve as we note below.

Chart: EURNOK
From here, EURNOK prospects are focused to the downside (stronger NOK), provided oil finally breaks higher more durably than it has been able to recently, and provided we sidestep the double-dip fears in Europe and elsewhere from the COVID-19 outbreak, which may require a steady drumbeat of positive outcomes from the various vaccine candidates undergoing trials at present. If the outlook darkens, NOK could remain rangebound here and EURNOK could explore higher resistance levels after a series of lower highs that looks NOK-positive, provided we soon break below this line of consolidation and the 10.50 area more forcefully. That could set up a run toward the next important area into 10.30-25. Specific to today’s key Fed chair Powell event risk and beyond the medium term fundamental situation, If Powell’s speech triggers a “sell the fact” consolidation in the narrative supporting risky assets and even oil prices in recent weeks, NOK could be in for some rough sailing here, but the structural picture looks better for NOK at these valuations than for the euro, so any setback and squeeze higher would likely prove temporary unless we are headed for a profound and sustained new trough in oil prices and market sentiment. We’ll update the outlook either way on EURNOK in the days ahead, but the situation will likely need to break one way or the other in the near term after a persistent shrinking of trading ranges over the last several weeks.

Source: Saxo Group
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.