The US retail sales data yesterday was one of the worst macroeconomic data shocks in recent memory. The January ex-Autos and Gas saw a steep –1.4% drop month-on-month, the
worst single month drop since March of 2009 and worst December drop since the beginning of the data series in the early 1990s.
The data saw US yields dropping sharply all along the curve – more aggressively at the long end. The consequent dose of risk-off helped engineer a sharp turnaround in the JPY back to strength, just ahead of pivotal levels in USDJPY (the 200-day moving average a bit higher than yesterday’s 111.00+ highs).
The sharp turnaround came despite a firm USD elsewhere and thus a sharper turnaround in other JPY cross suggests we may have finally just seen a key low for the JPY, which is set to thrive if the global outlook worsens and the market continues to head for the solace of safe havens like long US treasuries and as Japan’s carry traders find themselves
in a bind in EM and other positive carry positions.
The latest Chinese credit data showed a record injection of credit into the economy ahead of the Chinese New Year, and
a recent report from the New York Fed argues that China’s credit growth represents 60% of global – yes, global – credit growth over the last ten years. It is clear that the USDCNY rate has to be under enormous pressure as long as credit growth remains this high, but also likely that a lid is kept on the rate at least until we have the semblance of an outcome to US-China trade talks.
As this week draws to a close, the key question across markets, currency and otherwise, is whether the rally in risk appetite from the late December lows, inspired by the Fed’s turnaround in its policy stance, has now drawn to a close. Much like late 2007, the idea could switch from a focus on celebrating the Fed’s softening tone to the horrible recognition that this turnaround development has come too late and that policymakers in the US and globally are already far behind the curve. Today’s close of trading could prove important for whether we are set for a new bout of unease across markets if we tilt into the weekend with heavy price action in equity markets.
Chart: EURJPY
USDJPY is the most heavily traded JPY cross and the real benchmark for relative JPY strength, but we suspect that a fresh downdraft in risk appetite could see both a strong USD and perhaps even stronger JPY, perhaps most heavily felt in crosses like CADJPY and AUDJPY, but EURJPY is another candidate, given the gathering clouds over Europe after Germany showed no growth in Q4 and EURUSD is trying mightily to break the range lows. So further risk off could set in motion both expanding JPY and EUR volatility in the weeks ahead. Technically, we’ve consistently rejected the rallies at range resistance, but need a close solidly below 124.00 to suggest expanding downside momentum.
