JPY, CHF rise as investors seek safe haven

Currencies are showing classic signs of risk-off behaviour as traders head into JPY and CHF, seeking refuge as an embattled President Trump continues to rattle markets with trade war rhetoric and as Italy awaits its latest potential sovereign bond rating adjustments from Fitch.

EURCHF has taken a sharp turn for the worse, perhaps in part driven by fears that Italy’s sovereign debt faces downgrades from Fitch and others, but also on some alarming rhetoric from EU Commissioner Moscovici, who remarked in an interview with an Italian newspaper that “if you create the conditions for exiting the euro, it means that it is actually what you want”. Among other rather stark comments, he also stated that “the euro provides for compliance with rules, not respecting the rules means wanting to leave the monetary union”.

It is clear that Italy’s government does not want to respect the rules, or wants at least to have those rules changed to allow for larger deficits – something has to give. For now, that thing is EURCHF, which is staring down the lows for the cycle again below 1.1300. As well, EURJPY has reversed course again after its recent chunky rally. The Italian government has also threatened to disrupt the EU budget process in recent days on the issue of immigration. 

Elsewhere, the action is mixed today after yesterday’s brutal session for emerging markets, which was led by the parabolic downward spiral in the Argentinian peso and fresh woes for the Turkish lira as the country's central bank governor resigned yesterday. China continues to hold the floor under its currency, and the US dollar doesn’t seem to be leading the action today, as the highest beta currencies to market developments are suddenly the JPY and CHF.

Yesterday’s US July PCE inflation data were in-line with expectations (matching the recent peak of 2.0% at the core) and not much reaction today after the EU August flash CPI level came in a tad softer than expected at 1.0% core/2.0% headline, both 0.1% below the July readings.

Trump’s ongoing trade tantrums, including fresh EU bashing and threats to slap tariffs on another $200 billion of imports from China are seeing Beijing cosying up to Japan on trade, among other effects. The continued application of these policies will harm US growth and result in stagflationary risks that present an ugly quandary for the Powell Fed. Given the reversal potential in USDJPY here (see chart below) and the recent large reversal in EURUSD, we are pondering whether the US dollar has more decisively turned the corner here and set for a longer-term weakening. 

Looking ahead, we have a three-day weekend in the US (Labor Day on Monday) and the flurry of US first-week-of-the month data next week, where we will look for whether the tilt toward negative US data surprise becomes even more severe.

Chart: USDJPY

USDJPY has turned tail in a critical area near the top of the daily Ichimoku cloud and is suddenly now having a look at the bottom of the cloud. That level and down into the recent lows and the 200-day moving average in roughly the 110.00 area look pivotal for establishing whether USDJPY is at risk of tilting into a new bear trend. If US yields remain low and risk appetite continues to suffer, this could keep the downside pressure on the pair into the next retracement levels below 108.00.