FX Update: A blast from the risk-off past for FX. More to come?
Summary: An ugly reversal in global risk sentiment, together with a solid rally in treasuries, had the USD and JPY on the bid across the board in what used to be the typical pattern for risk-off developments across markets, in stark contrast to the patterns brought about in the recent past by rising yields. The G10 smalls were hit the hardest on this development, which could extend if volatility is set to rise further.
FX Trading focus: A classic risk off wave – any more and things start breaking again
In yesterday’s FX Update, I outlined what could go wrong for USD bears after the recent, rather sharp sell-off in the greenback, and chief among them was the simple notion that any pronounced weakening in risk sentiment could suddenly extend the big dollar a helping hand after its recent bout of weakness. And that is indeed what we got yesterday, in the form of a “classic” risk-off wave of equity selling while treasuries rallied (a throwback to prior market regimes before the situation earlier this year in which concerns centered on the spike in treasury yields). The classic twist of treasuries rallying while equities sold off meant that not only the USD backed up, but the JPY did so as well, with some interesting implications for JPY crosses, as noted in EURJPY, but also potentially in AUDJPY as discussed in this morning’s Saxo Market Call podcast. Japan also got a jolt overnight as officials there are considering whether Tokyo and Osaka will require a Covid-related declaration of emergency and an ex-minister said it was time to consider cancelling or delaying the Olympics, which apparently don’t enjoy popular support, with 70% against.
I find the attribution in the headlines to the sudden setback in risk sentiment to “new Covid concerns” a bit silly, given the massive new wave was rising quickly as much as a few weeks ago, and this doesn’t feel like a market where one can get a sense of rising risk, given the suppression of price discovery in bonds, whether sovereign or corporate. Our Steen Jakobsen’s article yesterday does point to some of the remarkable statistical and sentiment extremes the market has reached, and we recently pointed to MSCI World index valuations as historically stretched. So if this is the beginning of a partial bubble unwind at worst, or merely a chunky consolidation/setback, there could be plenty more USD and JPY strength in the near term. I like trading this via short AUD and CAD – USDCAD long already now it if stays above 1.2550 for a possible extension to 1.3000 (watch out for BoC today, though don’t see them making waves), while AUDJPY downside optionality looks reasonably priced, EURJPY downside is tradable by spot, and short AUDUSD can be added on a close south of 0.7650, which begins to point toward a more profound breakdown (the one that didn’t unfold as it threatened to on the prior break lower).
Elsewhere, EURUSD is teasing 1.2000 and I have a hard time seeing that hanging on, although there are a number of retracement supports worth noting after the recent strong surge off the 1.1700 area lows – far too early to call for significant downside risk there – will watch 1.1925-50 (200-day moving average and first retracement) and then the 1.1850 area as the major 61.8% Fibo retracement area and last gasp support ahead of the 1.1700 cycle low.
Chart: EURJPY
A key day reversal yesterday for EURJPY, as the risk-off and punchy rally in sovereign bonds was a whiplash-inducing contrast with the prior day’s surge in EU yields and recent, more positive spin on Europe’s post-pandemic prospects. The reversal certainly sets up a hook for bears to get involved with stops above the highs after yesterday’s shooting star candlestick, as long as yields remain tame here and risk sentiment corrects further. The level toward 128.00 looks important on the Ichimoku chart and is just below the sub-128.50 pivot low highlighted in the chart below. The market feels poorly positioned for JPY strength. AUDJPY is another pair worth noting – especially the 82.50-25 area.
Odds and ends
Shock German political poll shows Greens in the lead – a new poll from Forsa shows the CDU/CSU only polling at 21% relative to 28%. This is the first poll just after the announcement this week that Annalena Baerbock will seek the Chancellorship this September and that the CDU has thrown their support behind the unpopular Armin Laschet. I am surprised that the CDU is doubling down on their candidate Laschet over the more dynamic Söder, but I am no German political analyst. This polls is a huge shift from a series of recent polls and could have something to do with the freshness of the news and merely a shallow popularity poll of these two personalities. Regardless, German polls will bear close watching until the late September election, as the key point is that a Green German government would be a political revolution not just for Germany, but also for the EU, ending the decades of cautious “debt brake” and “Schwarzer null” fiscal principles in favour of vastly opening spending for climate initiatives and a tighter union in the EU.
Less urgency for ECB message at meeting after yesterday? If EU yields stay generally tamed through today’s Bund auction, the ECB’s task tomorrow becomes a bit easier, though I never understood why the central bank ever got as exercised as it did on the rise in bond yields earlier this year (and any “vigilance” expressed tomorrow against rising yields isn’t particularly relevant if yields remain tame to lower elsewhere). From here through the German election, the focus has to be more acute on the future of EU politics, as noted above with the huge shifts in German politics.
John Hardy
Head of FX Strategy
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. This content is not intended to and does not change or expand on the execution-only service. 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.
FX Trading focus: A classic risk off wave – any more and things start breaking again
In yesterday’s FX Update, I outlined what could go wrong for USD bears after the recent, rather sharp sell-off in the greenback, and chief among them was the simple notion that any pronounced weakening in risk sentiment could suddenly extend the big dollar a helping hand after its recent bout of weakness. And that is indeed what we got yesterday, in the form of a “classic” risk-off wave of equity selling while treasuries rallied (a throwback to prior market regimes before the situation earlier this year in which concerns centered on the spike in treasury yields). The classic twist of treasuries rallying while equities sold off meant that not only the USD backed up, but the JPY did so as well, with some interesting implications for JPY crosses, as noted in EURJPY, but also potentially in AUDJPY as discussed in this morning’s Saxo Market Call podcast. Japan also got a jolt overnight as officials there are considering whether Tokyo and Osaka will require a Covid-related declaration of emergency and an ex-minister said it was time to consider cancelling or delaying the Olympics, which apparently don’t enjoy popular support, with 70% against.
I find the attribution in the headlines to the sudden setback in risk sentiment to “new Covid concerns” a bit silly, given the massive new wave was rising quickly as much as a few weeks ago, and this doesn’t feel like a market where one can get a sense of rising risk, given the suppression of price discovery in bonds, whether sovereign or corporate. Our Steen Jakobsen’s article yesterday does point to some of the remarkable statistical and sentiment extremes the market has reached, and we recently pointed to MSCI World index valuations as historically stretched. So if this is the beginning of a partial bubble unwind at worst, or merely a chunky consolidation/setback, there could be plenty more USD and JPY strength in the near term. I like trading this via short AUD and CAD – USDCAD long already now it if stays above 1.2550 for a possible extension to 1.3000 (watch out for BoC today, though don’t see them making waves), while AUDJPY downside optionality looks reasonably priced, EURJPY downside is tradable by spot, and short AUDUSD can be added on a close south of 0.7650, which begins to point toward a more profound breakdown (the one that didn’t unfold as it threatened to on the prior break lower).
Elsewhere, EURUSD is teasing 1.2000 and I have a hard time seeing that hanging on, although there are a number of retracement supports worth noting after the recent strong surge off the 1.1700 area lows – far too early to call for significant downside risk there – will watch 1.1925-50 (200-day moving average and first retracement) and then the 1.1850 area as the major 61.8% Fibo retracement area and last gasp support ahead of the 1.1700 cycle low.
Chart: EURJPY
A key day reversal yesterday for EURJPY, as the risk-off and punchy rally in sovereign bonds was a whiplash-inducing contrast with the prior day’s surge in EU yields and recent, more positive spin on Europe’s post-pandemic prospects. The reversal certainly sets up a hook for bears to get involved with stops above the highs after yesterday’s shooting star candlestick, as long as yields remain tame here and risk sentiment corrects further. The level toward 128.00 looks important on the Ichimoku chart and is just below the sub-128.50 pivot low highlighted in the chart below. The market feels poorly positioned for JPY strength. AUDJPY is another pair worth noting – especially the 82.50-25 area.
Odds and ends
Shock German political poll shows Greens in the lead – a new poll from Forsa shows the CDU/CSU only polling at 21% relative to 28%. This is the first poll just after the announcement this week that Annalena Baerbock will seek the Chancellorship this September and that the CDU has thrown their support behind the unpopular Armin Laschet. I am surprised that the CDU is doubling down on their candidate Laschet over the more dynamic Söder, but I am no German political analyst. This polls is a huge shift from a series of recent polls and could have something to do with the freshness of the news and merely a shallow popularity poll of these two personalities. Regardless, German polls will bear close watching until the late September election, as the key point is that a Green German government would be a political revolution not just for Germany, but also for the EU, ending the decades of cautious “debt brake” and “Schwarzer null” fiscal principles in favour of vastly opening spending for climate initiatives and a tighter union in the EU.
Less urgency for ECB message at meeting after yesterday? If EU yields stay generally tamed through today’s Bund auction, the ECB’s task tomorrow becomes a bit easier, though I never understood why the central bank ever got as exercised as it did on the rise in bond yields earlier this year (and any “vigilance” expressed tomorrow against rising yields isn’t particularly relevant if yields remain tame to lower elsewhere). From here through the German election, the focus has to be more acute on the future of EU politics, as noted above with the huge shifts in German politics.
John Hardy
Head of FX Strategy
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. This content is not intended to and does not change or expand on the execution-only service. 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.
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