FX Update: Was that it?
Summary: Markets are trying to stabilize again after a traumatic couple of days, and USD bears are trying to get back on track as the week winds down into the close today. We note a hot inflation reading from the US PCE inflation data series today after the hot reading out of Germany yesterday and from elsewhere earlier this week. US yields are back sharply higher, boosting the sense that the markets are trying to shake off the distractions of the last couple of days.
FX Trading focus: Was that it?
The last couple of days have seen wild gyrations in asset markets linked to the intense short squeeze of a basket of popular (among hedge funds) shorting targets, most notably in the US, and FX traders have been innocent bystanders as the usual correlations have kicked in when risky assets lurch into a spot of trouble (i.e.., USD strong, commodity dollars and EM weak), save for the marked weakness in the JPY, something we noted over the last couple of session. Today things are looking a bit less odd in that at least US long yields have kicked back higher, even after a strong 7-year treasury auction of a staggering $62 billion yesterday. It is worth noting that the US 10-year benchmark rallied sharply, but failed to take out the 100 bps level and if yields head back higher again, we’re unlikely to see the JPY stage any sort of major comeback in broad terms. Still, I would expect that if global markets shake off the zany risk-off episode that roiled markets this week, the USD could yet underperform the JPY unless US yields surge to significant new highs for the cycle.
The jury is still out on what will unfold in the very short term after the vicious volatility of the last couple of days, but a huge rally in bitcoin and precious metals and the aforementioned sell-off in US treasuries suggest the inflation/reflation/run-from-fiat trade is being put back on to a significant degree today – also note the considerable comeback in the commodity dollars and EM today, which suggest that the bottom may already be in for the sharp consolidation in these trades, though markets seem to change direction daily, so I would like to see risk appetite and inflation-linked trades post a strong close today and thus for the week to have more confidence on that front.
By the way, inflation readings are coming in hot all over the world lately, with today’s US PCE core in at a +0.3% QoQ and +1.5% YoY vs. +0.1%/+1.3% expected, respectively, and German inflation came in very hot yesterday as well, not to mention the hot readings in Q4 for New Zealand last week and Australia this week – two countries where currencies were actually quite strong for the quarter. Just wait until we see the other side of basing effects in March and April…
Chart: EURUSD
A glance over at EURUSD suggests nothing much of all has been transpiring across markets, which could hardly be farther from the truth, with drama muted in this pair because the euro has outperformed the risky currencies during this latest bout of volatility, leaving EURUSD very range bound. The medium term setup is still clear – that the pair had a nice orderly consolidation that tested just below the 38.2% retracement of the large rally wave from late last year (1.2050 local low), which is the tactical support for remounting a charge on the highs for the cycle, and if we avoid an uglier deleveraging event here, the EURUSD higher trade is a less volatile way to trade for a resumption of the USD bear market, adding possibly EM and commodity dollar trades to the mix next week if those recovery smartly versus the USD into the close of the day and week today and into early next week. The key upside objective to take out is the 1.2200 area for the bulls.
A brief word on CNY and CNH
The most notable development in FX at the moment outside USD direction and the JPY’s sometimes erratic correlations is the considerable strength in the renminbi, as authorities there are tightening liquidity for some reason just ahead of the two-week New Year holiday, an important move that some suggest is a being made to avoid financial bubbles and the subsequent need to clean up after these. Note that the big surge in the CSI stock index, for example, which recently threatened above the 2015 spike high and looked to even have a go at the even higher 2007 highs (when nominal CNY size of Chinese economy was less than 25% of today, it should be noted) Both of those episodes were PR embarrassments for the country. There has also been rhetoric from official sources inveighing against real estate speculation. Something to watch, for sure, but for now certainly puts a bit more pep in USD bears’ step to see USDCNY plunging to new lows ahead of the weekend.
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: Was that it?
The last couple of days have seen wild gyrations in asset markets linked to the intense short squeeze of a basket of popular (among hedge funds) shorting targets, most notably in the US, and FX traders have been innocent bystanders as the usual correlations have kicked in when risky assets lurch into a spot of trouble (i.e.., USD strong, commodity dollars and EM weak), save for the marked weakness in the JPY, something we noted over the last couple of session. Today things are looking a bit less odd in that at least US long yields have kicked back higher, even after a strong 7-year treasury auction of a staggering $62 billion yesterday. It is worth noting that the US 10-year benchmark rallied sharply, but failed to take out the 100 bps level and if yields head back higher again, we’re unlikely to see the JPY stage any sort of major comeback in broad terms. Still, I would expect that if global markets shake off the zany risk-off episode that roiled markets this week, the USD could yet underperform the JPY unless US yields surge to significant new highs for the cycle.
The jury is still out on what will unfold in the very short term after the vicious volatility of the last couple of days, but a huge rally in bitcoin and precious metals and the aforementioned sell-off in US treasuries suggest the inflation/reflation/run-from-fiat trade is being put back on to a significant degree today – also note the considerable comeback in the commodity dollars and EM today, which suggest that the bottom may already be in for the sharp consolidation in these trades, though markets seem to change direction daily, so I would like to see risk appetite and inflation-linked trades post a strong close today and thus for the week to have more confidence on that front.
By the way, inflation readings are coming in hot all over the world lately, with today’s US PCE core in at a +0.3% QoQ and +1.5% YoY vs. +0.1%/+1.3% expected, respectively, and German inflation came in very hot yesterday as well, not to mention the hot readings in Q4 for New Zealand last week and Australia this week – two countries where currencies were actually quite strong for the quarter. Just wait until we see the other side of basing effects in March and April…
Chart: EURUSD
A glance over at EURUSD suggests nothing much of all has been transpiring across markets, which could hardly be farther from the truth, with drama muted in this pair because the euro has outperformed the risky currencies during this latest bout of volatility, leaving EURUSD very range bound. The medium term setup is still clear – that the pair had a nice orderly consolidation that tested just below the 38.2% retracement of the large rally wave from late last year (1.2050 local low), which is the tactical support for remounting a charge on the highs for the cycle, and if we avoid an uglier deleveraging event here, the EURUSD higher trade is a less volatile way to trade for a resumption of the USD bear market, adding possibly EM and commodity dollar trades to the mix next week if those recovery smartly versus the USD into the close of the day and week today and into early next week. The key upside objective to take out is the 1.2200 area for the bulls.
A brief word on CNY and CNH
The most notable development in FX at the moment outside USD direction and the JPY’s sometimes erratic correlations is the considerable strength in the renminbi, as authorities there are tightening liquidity for some reason just ahead of the two-week New Year holiday, an important move that some suggest is a being made to avoid financial bubbles and the subsequent need to clean up after these. Note that the big surge in the CSI stock index, for example, which recently threatened above the 2015 spike high and looked to even have a go at the even higher 2007 highs (when nominal CNY size of Chinese economy was less than 25% of today, it should be noted) Both of those episodes were PR embarrassments for the country. There has also been rhetoric from official sources inveighing against real estate speculation. Something to watch, for sure, but for now certainly puts a bit more pep in USD bears’ step to see USDCNY plunging to new lows ahead of the weekend.
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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