FX Update: USD and JPY jump again on market turbulence

Please note: I am penning a series of daily articles on the US Election countdown and in yesterday’s “T-minus six days” article I ran down five US Election outcome scenarios and how the US dollar and other major asset classes might react under each scenario.

Today’s FX Trading focus:

Risk deleveraging boosting the usual suspects, if not spectacularly
The stronger JPY has been a consistent theme of late and the yen stayed firm through yesterday’s risk deleveraging in equity markets, with an interesting wrinkle later in the session as, probably no coincidence, the firmness shifted to a bit of weakness as US treasuries sold off sharply from new multi-day highs and actually ended the day lower than where they started. If US treasuries fail to act as a safe haven on a day like yesterday or in general through a larger equity market setback, the scale of any JPY rally could prove more modest than if US yields were to push toward cycle lows and beyond

The USD was likewise stronger yesterday, with the commodity currency holdouts finally waking up and smelling the risk off coffee, as the bottom fell out of AUD in particularly and AUDUSD is now within sniffing distance, to keep the olfactory metaphor, of the critical 0.7000 level. Given the scale of the sell-off from the recent US equity market highs to where we ended yesterday, the AUDUD consolidation looks relatively modest. We like the reflationary story for AUD in a Blue Wave outcome in the US outcome in particular, and therefore like the prospects for a much stronger AUDUSD next year. In that vein, worth stocking up on a quarter to a half long position through options now and another half if further turbulence continues over the US election and triggers a washout in AUDUSD longs. For perspective, with AUDUSD trading around 0.7040 this morning, a 0.7300 call for April 1 cost 96 pips and a 0.7500 call for July 1 cost 84 pips.

Chart: USDJPY
The big 104.00 level is coming into view – an important one as it is the September low and the lowest level traded since 2016 save for a few chaotic sessions during the Covid-19 panic this spring. A break potentially opens for 100.00 or lower, although it is difficult to understand how many are willing to take large directional bets on major USD pairs ahead of the US election. In my US Election  “Train Wreck” scenario of a hotly contested election in which it becomes clear that the election will both be contested even if Biden likely to emerge the winner and that the Republicans will maintain the US Senate. On top of possibly tremendous market volatility around the contest election period itself, the ensuing anticipation of weak US stimulus as the Republican Senate blocks anything and everything the Democrats want would possibly nix much of the anticipation of reflation in the US and lead to an even more hyperactive Fed as the yield curve flattens aggressively. Such a set of developments could favor JPY the most among G10 currencies and could drive USDJPY well below 100.00.