FX Update: Waxing cautious on risk correlated FX
Summary: Movements in FX are moving sharply against recent trends as the commodity dollars are suddenly on their backfoot, while a less dovish than expected ECB is seeing the euro firming across the board, with the USD likewise firming against risk-correlated FX, especially in EM. The SaxoStrats team is urging near term caution on risk exposure, and this goes for currencies as well.
FX Trading focus: waxing cautious on risk-correlated FX
In today’s Saxo Market Call podcast, we waxed cautious on risk exposure, in part on signs of the correction in some of the most speculative assets that have been the star performers since the pandemic lows of last spring. Our CIO Steen Jakobsen also penned a note along the same lines and urges caution as well, also pulling out AUDJPY as a traditionally very good risk proxy, a chart of which I look at below. Yesterday, I also noted briefly in my G-10 rundown that, although the conditions for USD weakness had been about as supportive as they possibly could be in recent days, with treasuries trading sideways and maximum risk-on in global equity markets, the USD weakness underwhelmed. This may also be a sign that momentum in recent larger trends is flagging.
The ECB yesterday is one of the fundamental developments that is cause for pause for those believing central banks will continue to underwrite liquidity expansion and financial conditions to infinity and beyond. In the ECB presser, President Lagarde said that the ECB might not even have to employ all of its expanded target of purchases if financial conditions remain favourable, and it is worth nothing that some peripheral spreads were backing up recently even before this rather odd statement, even if Lagarde also equivocated that an expansion of purchases could also be necessary. Peripheral spreads backed up even more sharply yesterday and are at a new high for the year in the case of Germany-Spain 10-year debt at 63 basis points and at highs since early November for Germany-Italy 10-year debt at north of 120 basis points today. Add this to the recent Fed talk of taper, even if that was pushed back against (with cryptic comments from Clarida that could be read as not so dovish, assuming inflation does actually pick up), and then the pushback on negative rates from the BoE’s Bailey and a more optimistic Bank of Canada and one gets the sense that, despite ongoing pandemic limitations on the ground, the delta on central bank guidance has flipped to the hawkish side, however gently.
We have the next FOMC meeting up next Wednesday, by the way.
Chart: AUDJPY
AUDJPY has long traded as an excellent risk proxy among G-10 pairs, traditionally from a carry perspective as Australia used to run one of the higher policy rates within G-10 and Japan has wallowed around close to zero for more than two decades. In more recent times, it is more about Australia as a proxy for the reflation trade and the strength in specific commodities, especially iron ore and the demand for Australia’s exports into the star performer since the pandemic breakout, China. So if we are set to see a second guessing of the risk-on parade, and to some degree the reflation trade (perhaps to be differentiated from the simple inflation trade, which is less positive) – a risk-correlated pair like AUDJPY could be in for a correction. Note that the MACD has crossed over to the downside, suggesting that AUDJPY is at a pivotal point here after mounting a low-energy retracement of the recent sell-off, and generally not correlating well with the recent surge in mny other risk assets. The pair can push all the way back to 76.50 without beginning to really strain the up-trend.
Odds and Ends: sterling stumbles and inflation
Sterling struggling: the rally in sterling has stumbled rather badly after new cycle highs for the pound against both the USD and the euro were explored earlier this week. This is at least the fourth time that new highs in GBPUDS have been rejected, but the EURGBP backing up above 0.8900 is particularly disappointing, given the. The latter may be down to the ECB surprise, and the action hasn’t backed up sufficiently to fully reject the recent sell-off move, but it’s not a welcome development, and any follow through back higher through 0.9000 would put the kibosh on talk of a sterling revival for now.
The New Zealand CPI came out overnight, and interesting to see it coming in as hot as it did at 0.5% QoQ and +1.4% YoY vs. +0.2%/+1.1% expected, given that the currency rose some 4.5% in trade weighted terms and 10% in JP Morgan’s real-effective adjusted terms in the fourth quarter. Inflation is going to be a tremendous focus, as well as whether medium-and longer rates, as well as central bank policy expectations, react to the incoming inflation data or try to get clever (like the Bank of Canada did in its statement) on inflation calming again once a few months of base-effect driven jumps has faded.
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: waxing cautious on risk-correlated FX
In today’s Saxo Market Call podcast, we waxed cautious on risk exposure, in part on signs of the correction in some of the most speculative assets that have been the star performers since the pandemic lows of last spring. Our CIO Steen Jakobsen also penned a note along the same lines and urges caution as well, also pulling out AUDJPY as a traditionally very good risk proxy, a chart of which I look at below. Yesterday, I also noted briefly in my G-10 rundown that, although the conditions for USD weakness had been about as supportive as they possibly could be in recent days, with treasuries trading sideways and maximum risk-on in global equity markets, the USD weakness underwhelmed. This may also be a sign that momentum in recent larger trends is flagging.
The ECB yesterday is one of the fundamental developments that is cause for pause for those believing central banks will continue to underwrite liquidity expansion and financial conditions to infinity and beyond. In the ECB presser, President Lagarde said that the ECB might not even have to employ all of its expanded target of purchases if financial conditions remain favourable, and it is worth nothing that some peripheral spreads were backing up recently even before this rather odd statement, even if Lagarde also equivocated that an expansion of purchases could also be necessary. Peripheral spreads backed up even more sharply yesterday and are at a new high for the year in the case of Germany-Spain 10-year debt at 63 basis points and at highs since early November for Germany-Italy 10-year debt at north of 120 basis points today. Add this to the recent Fed talk of taper, even if that was pushed back against (with cryptic comments from Clarida that could be read as not so dovish, assuming inflation does actually pick up), and then the pushback on negative rates from the BoE’s Bailey and a more optimistic Bank of Canada and one gets the sense that, despite ongoing pandemic limitations on the ground, the delta on central bank guidance has flipped to the hawkish side, however gently.
We have the next FOMC meeting up next Wednesday, by the way.
Chart: AUDJPY
AUDJPY has long traded as an excellent risk proxy among G-10 pairs, traditionally from a carry perspective as Australia used to run one of the higher policy rates within G-10 and Japan has wallowed around close to zero for more than two decades. In more recent times, it is more about Australia as a proxy for the reflation trade and the strength in specific commodities, especially iron ore and the demand for Australia’s exports into the star performer since the pandemic breakout, China. So if we are set to see a second guessing of the risk-on parade, and to some degree the reflation trade (perhaps to be differentiated from the simple inflation trade, which is less positive) – a risk-correlated pair like AUDJPY could be in for a correction. Note that the MACD has crossed over to the downside, suggesting that AUDJPY is at a pivotal point here after mounting a low-energy retracement of the recent sell-off, and generally not correlating well with the recent surge in mny other risk assets. The pair can push all the way back to 76.50 without beginning to really strain the up-trend.
Odds and Ends: sterling stumbles and inflation
Sterling struggling: the rally in sterling has stumbled rather badly after new cycle highs for the pound against both the USD and the euro were explored earlier this week. This is at least the fourth time that new highs in GBPUDS have been rejected, but the EURGBP backing up above 0.8900 is particularly disappointing, given the. The latter may be down to the ECB surprise, and the action hasn’t backed up sufficiently to fully reject the recent sell-off move, but it’s not a welcome development, and any follow through back higher through 0.9000 would put the kibosh on talk of a sterling revival for now.
The New Zealand CPI came out overnight, and interesting to see it coming in as hot as it did at 0.5% QoQ and +1.4% YoY vs. +0.2%/+1.1% expected, given that the currency rose some 4.5% in trade weighted terms and 10% in JP Morgan’s real-effective adjusted terms in the fourth quarter. Inflation is going to be a tremendous focus, as well as whether medium-and longer rates, as well as central bank policy expectations, react to the incoming inflation data or try to get clever (like the Bank of Canada did in its statement) on inflation calming again once a few months of base-effect driven jumps has faded.
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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