FOREX 5 minutes to read

JPY pulling for more gains

John Hardy

Head of FX Strategy

Summary:  The wobbly carry trade backdrop in high-yield EM currencies and strong sovereign bond markets are powering a firming Japanese yen. The last piece for a notable extension of the move would be a sell-off in major equity markets.


We’re none the wiser on Brexit today after none of the menu of indicative votes yesterday in the UK parliament passed even after May offered to resign if her deal is approved. May’s deal is getting increasing support from key Tory figures now on the fear that its failure would eventually lead to no Brexit at all. But a tiny group of hard Brexit ERG Tories and the Northern Ireland's DUP are holdouts and the indicative votes show that there is still no agreement on how to proceed on a failure of May’s deal.

More votes to are be held today – some clarity on where we go next surely emerges ahead of the weekend, but the long delay options may do sterling few favours.

The most prominent mover since yesterday has been the yen as it once again changes directions, this time back to the strong side, driven in general by the strong bid in the major sovereign bond markets and perhaps as well by fresh wobbles in high-yield EM, a threat to JPY-funded carry trading. EURJPY is down through support again and we put it back on our trading interest watchlist below. A further across the board extension of JPY strength likely will require a general deleveraging in risk assets that spreads to the major equity markets.

European Central Bank President Mario Draghi and other officials were out trying to reassure markets that the ECB would like to ease the impact of negative rates on banks, but specifics were few until this morning, when chief economist Peter Praet aired the idea of tiered rates for banks, in which only excess reserves over a certain amount would suffer the full weight of the negative deposit rates. This is a practice that the Bank of Japan already employs. But Praet said there would need to be a “monetary policy case” for tiering rates. Market impact of this policy negligible.

EM currencies have weakened considerably in spots, with the move a bit sharper than the sell-off in equities would point to, though there are signs of global safe haven seeking in major sovereign bond markets and emerging market spreads are a bit wider in recent sessions. The most volatility in recent sessions has been seen in the Turkish lira, where overnight implied yields have risen to over 1000% as the authorities discourage speculation ahead of the Turkish regional elections this weekend. The roll of spot positions from Friday to Monday today looks will be very expensive for TRY shorts – currently priced over 3%!

Trading interest

We are back to favouring JPY longs via USDJPY and EURJPY even after the recent crazy gyrations have shaken our confidence. Stops above 110.75 in USDJPY and above 124.50 in EURJPY
Still like AUDNZD longs here on dips as long as we stay above 1.0350.
Maintaining USDCAD longs with stops below 1.3330.

Chart: EURJPY

Euro sentiment is weak again as EURUSD slides toward 1.1200 again and Brexit worries remain, while the ECB is short on policy options to address the bloc’s growth slowdown. EURJPY is breaking lower below the key 124.00 level again after a recent false move  below that level. Ready now for a notable extension lower?
Source: Saxo Bank
The G10 rundown

USD – the fact that US interest rates have the farthest to fall is a dual-edged sword – offering the most reward for long treasury buyers if rates continue to collapse, but also meaning, particularly at the short end, that yield spreads versus other currencies can collapse more in the USD’s disfavour.

EUR – support failing in EURJPY – could this finally lead to a proper trending move after the prior feint? And EURUSD is wending its way towards that hugely important 1.1200 area. Might need a bad Brexit situation to finally blast that pair out of the range.

JPY – the yen finds its legs again as sovereign bond markets remain bid and carry trades come under pressure. We are once again constructive on further strength after a few sessions of whiplash.

GBP – sterling trading unchanged after trying to hope for a breakthrough yesterday as it still appears May doesn’t have the last votes needed ahead of the weekend. A long delay won’t necessarily do sterling any favours even if we avoid the No Deal scenario

CHF – the 1.1200 level in EURCHF under pressure and may have a hard time holding up if sterling takes an ugly dive on a long delay in Brexit uncertainty or worse and risk sentiment is generally poor.

AUD – desperately looking for range expansion in AUDUSD for a sense that the pair is ever going to make a break. While we have an acceleration in the anticipation of RBA easing, Australia mining stocks are pushing on multi-year highs.
CAD – yesterday saw another weak merchandise trade balance reading and oil prices rolling over are an additional risk and keep us focused higher for USDCAD. 
NZD – the follow on weakness from the RBNZ dovish turn so far not in evidence, but the kiwi’s star has likely peaked in the sky and we look for ways to sell the currency – perhaps via AUDNZD longs and even NZDUSD shorts eventually if the USD firms broadly.

SEK – weak euro and risk sentiment doing SEK no favours – the SEK bulls may be forced to surrender for now if these developments deepen. Yesterday’s Sweden Household lending survey showed another decline.

NOK – price action very discouraging for downside hopes in EURNOK and positioning will be vulnerable to a squeeze on this backup above 9.70 this morning.
 
Upcoming Economic Calendar Highlights (all times GMT)

09:10 – ECB’s Guindos to speak
10:00 – Euro Zone Mar. Confidence Surveys
11:15 – US Fed’s Quarles (voter) to speak
12:00 – Czech Central Bank Announcement
12:30 – US Q4 GDP Revision
12:30 – US Weekly Initial Jobless Claims
13:00 – Germany Mar. Flash CPI
13:30 – US Fed’s Clarida (Voter) to speak 
19:00 – Mexico Central Bank Rate Announcement
Disclaimer

The Saxo Bank 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 Bank 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 Bank 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 Bank 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 Bank 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 Bank 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/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.