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Could precious metals meltdown see new FX themes emerging?
Summary: Today, a look at the strong risk appetite rally encouraged by hopes for a respite or detente in the US-China trade war. Also, a look at some wild moves on AI-chip related moves, Amazon's big job cuts, earnings ahead, and especially, on whether the end of the precious metals meltdown could free up some focus on currencies more broadly after their recent lack of volatility, with particular focus on the JPY. This and more on today's pod, which is hosted by Saxo Global Head of Macro Strategy John J. Hardy.
Listen to the full episode now or follow the Saxo Market Call on your favorite podcast app.
Today’s Links
A link to my FX Update from today, in which I outline support for the meltdown in precious metals possibly opening up some focus on, and volatility in FX, particularly the Japanese yen. The Bank of Japan can always provide some help at their meeting this Thursday with a hawkish surprise, but that may not even be a necessary ingredient as long as US treasury yields remain here or lower. A reader of this substack sent me a link to an X account he felt is following yesterday, and one of the first posts on that account was from Arnaud Bertrand, who I also follow and I definitely recommend. This post was a specific rebuttal of the X post I rather naively pointed to on the Saxo Market Call podcast yesterday, suggesting that China has the upper hand in the US-China trade talks and as a strategic rival - certainly in critical minerals supply chains. He also very usefully links to a RAND think tank report that suggest the US “deep state” is now thoroughly aware of the economic and strategic might that China’s has accumulated that the US shouldn’t engage in any attempt to seriously rival the country, but to figure out ways to co-exist and take things slowly and peacefully with Taiwan being absorbed into China. And here is Wolfgang Münchau weighing in, head in hands, on the disastrous German and EU attempts to approach China on the critical minerals issue, with China not even granting the German official any audience, forcing him to cancel his trip - and pointing to the Netherlands takeover of Nexperia as a key factor here. In foreign exchange, since you are always trading a relationship when you are trading an exchange rate, you are always simultaneously long the one currency and short the other. Experienced FX traders and of course, especially options traders often look at various gauges of not only the implied volatility of the exchange rate, but also the skew, or difference in the implied volatility of calls and puts. The single measure of that difference is called a “risk reversal”, which is given for a specific delta (usually 10-delta or 25-delta) and a specific time frame. So, for example, a 1-month, 25-delta risk reversal or a 3-month, 10-delta risk reversal. Traditionally, example, JPY pairs always had a negative risk reversal (upside protection cheaper than downside protection) because downside risk was associated with more significant, risk-off volatility. In the week ahead of Brexit, a 1-week, 10-delta GBPUSD risk reversal was as low as -30 (!) on the obvious risk that if the UK voted in favor of Leave, that would trigger far more volatility than a Stay vote. Occasionally over the years, I have looked at risk reversals as an indicator that might suggest market turning points if the trend continues in one direction, but the risk reversal starts to move in the opposite direction (as in the EURJPY vs. EURJPY 1-month, 25 delta risk reversal chart below). That is what we have seen recently in many of the JPY crosses, which have recently posted new highs, but the risk reversals are starting to move in the opposite direction, with implied volatility for puts higher relative to calls despite the higher prices. No indicator is a sure thing, but it is something one can add to other factors, like those I outlined in my FX update linked to above.Chart of the Day - EURJPY & EURJPY risk reversal
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