Chief Macro Strategist
Summary: The USD strength of yesterday yields to a fresh surge in risk appetite that has boosted the smaller currencies once again and sent the JPY close to its lowest levels for the cycle versus the US dollar. Is this a breakout in the making?
Trading interest
Markets could not even sustain a single full session of risk-off yesterday, once again making our attempt to wax a bit cautious look foolish, as every hitch in this market’s ongoing melt-up is met with a wall of buying on the assumption that policymakers around the world are in maximum stimulus mode, with the notable exception of the dithering Europeans. The idea that maximum liquidity and fiscal stimulus are on the menu from here and out over the horizon has been most rewarding for gold bulls as the yellow metal is breaking higher across the board and is possibly stealing the thunder from exchange rates themselves, broadly speaking. That will change if commodity prices come alive more generally as many currencies are linked rather closely to specific commodity stories. Stay tuned if the reflation trade makes a shocking comeback in the wake of the coronavirus outbreak.
In FX, while it is a no-brainer to see EM currencies and the smaller G10 currencies pulling back to the strong side on the latest bounce in sentiment, the persistent bid in safe haven bonds remains an odd off-note in the background.
Today, we have a number of voting Fed speakers, including the most dovish Fed voter ever, Neel Kashkari. The FOMC minutes are also up later today, where the market may peruse for signs of concerns that policy is driving financial stability risks, but the signals from this Fed have been very weak on that account so far.
Chart: USDJPY
While there are signs that the market is enthusiastic to buy currencies in countries at the forefront of the shift to fiscal stimulus and Japan has recently announced fairly generous stimulus plans, the JPY is suffering here and the concern may be that Japan is poorly positioned to benefit from stimulus in a world at risk of deglobalization. As well, we wonder if Japanese investors are looking at gold as an investment vehicle as XAUJPY has been hitting record levels for months. regardless, it is more than interesting that USDJPY is popping a new top here despite the ongoing resilient bid for safe haven bonds. Let’s see if this move holds into the close, as a strong move above 110.00 looks like a breakout in the making.
The G-10 rundown
USD – an interesting set of Fed speakers out today, but market probably rightly assumes that central bankers have given up on doing anything and that everything will be up to the political, fiscal cycle. Longer term, we would suggest that the market is under-pricing the risk of a Sanders presidency.
EUR – the euro struggling for air after an incredibly persistent run lower on fears of weak growth and political dysfunction keeping fiscal stimulus signals weak and tardy.
JPY – as noted above, the weak JPY despite still firm safe haven bonds is a possible game changer if it persists.
GBP – the CPI prints a bit higher than expected for January even as the pound has strengthened and this will have the market less concerned that the BoE will consider any cuts from here, especially given the prospects of a powerful fiscal stimulus in the works.
CHF – the franc strength ebbs a bit on this latest bounce in risk sentiment and USDCHF pokes to a new high – would expect correlation with USDJPY there.
AUD – the AUDUSD is down but not yet out as await the latest employment data from Down Under tonight. Time to look for fiscal signals as a possible support for the currency soon.
CAD – the USDCAD bulls facing setback risks here if commodities and risk sentiment continue to bounce – more cautious for calling CAD lower for now.
NZD – minor bump in kiwi overnight after RBNZ Governor Orr waxes positive on the NZ economy in testimony overnight, but no real reaction in NZ rates. Still watching for prospects for AUDNZD rally – i.e., waiting for Godot.
SEK – a weak CPI today, arguably on seasonality, but the market doesn’t like it and EURSEK poking on the reversal zone of 10.60-65 back higher, but hard to argue for a proper reversal
NOK – stimulus hopes and persistent bounce in oil helping the EURNOK threaten lower here – warming to the prospects for a follow through lower with a close below 10.00 as the confirmation.
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