FX Update: USD joins JPY in traditional safe haven role
Summary: With risk sentiment slipping into a more profound funk to start the week, the yen continues to bash its was stronger against every other currency, but the USD has changed course and is finally waking up to its role as a fellow safe haven when global risk assets are on the defensive. One key driver besides the COVID-19 resurgence is the sudden further escalation of the US political tensions over the death of Supreme Court Justice Ruth Bader Ginsburg, which could threaten the next round of stimulus.
Trading focus:
JPY strength is not just about USDJPY anymore, as all JPY crosses head south and the USD starts to play second fiddle more loudly as safe haven in non-JPY crosses.
The Friday action was rather confounding relative to historic patterns, as the weakening risk sentiment into the close of US trading for the week continue to drive the JPY stronger across the board – no big surprise there – but failed to register much at all in the smaller currencies’ fortunes against the US dollar. An odd-ball development like the ongoing USDZAR collapse late in the week was only modestly reversed on Friday. Perhaps the thinking was that as long as weak risk sentiment is mostly limited to the bubbly US markets, the volatility was actually USD-indifferent or even USD- negative at the margin. Also in the mix last week was the long term takeaway from the FOMC’s new Average Inflation Targeting regime, which is profoundly USD-bearish for the long term, assuming that inflation comes roaring back in the US and the Fed is slow to respond as long as unemployment is high (with the overriding assumption that US negative real rates would be worse than elsewhere in this AIT regime).
But the here and now of risk-on and risk-off can’t wait for long term implications rolled out by the Fed last week, it appears. And what we are seeing this morning is a deleveraging move that is suddenly far more global in nature, with especially European equity markets off to an ugly lurch lower to start the week. So the JPY continues stronger here, but the USD has moved back to the strong side against everything else – early “days” yet for the move, but we’ll watch the 1.1750 area again in EURUSD and, for example, 1.3250 in USDCAD and the 0.7200 area in AUDUSD for signs that the USD safe haven bid is coming back in, regardless whether USDJPY continues trading lower toward the next major support zone into 100.00. The implications of more USD strength and USDJPY pushing to 100.00 are obvious for key JPY crosses – EURJPY, AUDJPY and as we look at below, GBPJPY.
Chart: GBPJPY
Rolling two developments into one here, as an ugly weakening in global risk sentiment, with Europe finally waking up to the weakness shown in the US last week, has the JPY bashing its way stronger across the board, accelerating the GBPJPY sell-off. The pair now looks in full capitulation mode and could be set for a test of the 130.00 area again if some new Brexit news doesn’t shift sentiment. The UK, and London in particular, is at risk of new partial virus-related shutdowns and the negative rates talk from the BoE last week seems to have created a more negative focus that the first positive signs from Brexit talks were unable to offset.
US political situation somehow just got more tense, possibly blocking path to new stimulus round – This could be another source of the US market’s weakness this week. Trump appeared ready to move on new stimulus measures last week, but the death of liberal Supreme Court Justice Ruth Bader Ginsburg on Friday has supercharged the already hyper-partisan atmosphere as Trump and Senate Republicans are moving to quickly nominate and approve Ginsburg’s replacement before the election (court nominees only require a majority approval in the Senate, which is currently controlled 53-47 by Republicans). This has Democrats hopping mad after a Republican majority Senate frustrated Obama’s attempt to nominate a replacement for conservative justice Scalia who died more than eight months before the 2016 election. The situation bears close watching.
The G-10 rundown, express edition
USD – As noted above, the USD showing sigs of reverting to its role as a safe haven and brushing off last week’s post-FOMC meeting move.
EUR – the FT reports on ECB looking a major overhaul of its APP, which is likely to mean more size and flexibility in purchases (read: against former capital key and other rules – sure to eventually see more German/core resistance)
JPY - playing its role as safe haven currency as in so many markets past. The technical situation has taken on added import with the break below 105.00 in USDJPY.
GBP – the UK in a bad place with COVID-19 concerns and risk sentiment shift likely also weighing together with GBPJPY flow. 1.2750 an interesting pivot level in GBPUDS
CHF – the greenback outshining the franc as a safe haven.
AUD – would expect further relative weakness on risk sentiment deterioration and especially if UDSCNY joins in USD comeback here.
CAD – the 1.3250 level is local trigger for an extension higher in USDCAD, with 1.3300-50 a more structurally pivotal area.
NZD – weakening after an incredible attempt at cycle highs in NZDUSD on Friday – have to believe RBNZ will attempt to make new impact and talk up FX risks. NZDJPY coming alive suddenly here.
SEK – the krona rather resilient in not moving more aggressively lower versus the Euro here – could be bottled up by Riksbank tomorrow.
NOK – EURNOK working above local resistance 10.75+ and that’s without much weakness in oil prices. Price action could slip to at least 11.00.
5 Year Chart...
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Trading focus:
JPY strength is not just about USDJPY anymore, as all JPY crosses head south and the USD starts to play second fiddle more loudly as safe haven in non-JPY crosses.
The Friday action was rather confounding relative to historic patterns, as the weakening risk sentiment into the close of US trading for the week continue to drive the JPY stronger across the board – no big surprise there – but failed to register much at all in the smaller currencies’ fortunes against the US dollar. An odd-ball development like the ongoing USDZAR collapse late in the week was only modestly reversed on Friday. Perhaps the thinking was that as long as weak risk sentiment is mostly limited to the bubbly US markets, the volatility was actually USD-indifferent or even USD- negative at the margin. Also in the mix last week was the long term takeaway from the FOMC’s new Average Inflation Targeting regime, which is profoundly USD-bearish for the long term, assuming that inflation comes roaring back in the US and the Fed is slow to respond as long as unemployment is high (with the overriding assumption that US negative real rates would be worse than elsewhere in this AIT regime).
But the here and now of risk-on and risk-off can’t wait for long term implications rolled out by the Fed last week, it appears. And what we are seeing this morning is a deleveraging move that is suddenly far more global in nature, with especially European equity markets off to an ugly lurch lower to start the week. So the JPY continues stronger here, but the USD has moved back to the strong side against everything else – early “days” yet for the move, but we’ll watch the 1.1750 area again in EURUSD and, for example, 1.3250 in USDCAD and the 0.7200 area in AUDUSD for signs that the USD safe haven bid is coming back in, regardless whether USDJPY continues trading lower toward the next major support zone into 100.00. The implications of more USD strength and USDJPY pushing to 100.00 are obvious for key JPY crosses – EURJPY, AUDJPY and as we look at below, GBPJPY.
Chart: GBPJPY
Rolling two developments into one here, as an ugly weakening in global risk sentiment, with Europe finally waking up to the weakness shown in the US last week, has the JPY bashing its way stronger across the board, accelerating the GBPJPY sell-off. The pair now looks in full capitulation mode and could be set for a test of the 130.00 area again if some new Brexit news doesn’t shift sentiment. The UK, and London in particular, is at risk of new partial virus-related shutdowns and the negative rates talk from the BoE last week seems to have created a more negative focus that the first positive signs from Brexit talks were unable to offset.
US political situation somehow just got more tense, possibly blocking path to new stimulus round – This could be another source of the US market’s weakness this week. Trump appeared ready to move on new stimulus measures last week, but the death of liberal Supreme Court Justice Ruth Bader Ginsburg on Friday has supercharged the already hyper-partisan atmosphere as Trump and Senate Republicans are moving to quickly nominate and approve Ginsburg’s replacement before the election (court nominees only require a majority approval in the Senate, which is currently controlled 53-47 by Republicans). This has Democrats hopping mad after a Republican majority Senate frustrated Obama’s attempt to nominate a replacement for conservative justice Scalia who died more than eight months before the 2016 election. The situation bears close watching.
The G-10 rundown, express edition
USD – As noted above, the USD showing sigs of reverting to its role as a safe haven and brushing off last week’s post-FOMC meeting move.
EUR – the FT reports on ECB looking a major overhaul of its APP, which is likely to mean more size and flexibility in purchases (read: against former capital key and other rules – sure to eventually see more German/core resistance)
JPY - playing its role as safe haven currency as in so many markets past. The technical situation has taken on added import with the break below 105.00 in USDJPY.
GBP – the UK in a bad place with COVID-19 concerns and risk sentiment shift likely also weighing together with GBPJPY flow. 1.2750 an interesting pivot level in GBPUDS
CHF – the greenback outshining the franc as a safe haven.
AUD – would expect further relative weakness on risk sentiment deterioration and especially if UDSCNY joins in USD comeback here.
CAD – the 1.3250 level is local trigger for an extension higher in USDCAD, with 1.3300-50 a more structurally pivotal area.
NZD – weakening after an incredible attempt at cycle highs in NZDUSD on Friday – have to believe RBNZ will attempt to make new impact and talk up FX risks. NZDJPY coming alive suddenly here.
SEK – the krona rather resilient in not moving more aggressively lower versus the Euro here – could be bottled up by Riksbank tomorrow.
NOK – EURNOK working above local resistance 10.75+ and that’s without much weakness in oil prices. Price action could slip to at least 11.00.
5 Year Chart...
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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