Article / 14 June 2016 at 7:30 GMT

FX Update: A yen for market distress

Head of FX Strategy / Saxo Bank
  • Japan finance minister warns of yen intervention
  • Polish central bank says 'wouldn't mind' EURPLN at 5
  • EURUSD looking vulnerable to a downside correction

Yen at the heights: Japan says it will intervene if the JPY is driven 
overly high on risk-off speculation. Photo: iStock 

By John J Hardy

Japanese finance minister Taro Aso was out overnight warning on the yen strength and claiming the right to intervene based on the G20 and G7 agreements. Direct market intervention becomes likely with any brutal move lower in JPY crosses from here – and a virtual certainty if the action goes haywire in a Brexit scenario. 

As for the Bank of Japan meeting this Thursday, we deem it highly unlikely that the BoJ has anything up its sleeve as this meeting arrives at a time of extreme market stress ahead of the UK referendum. As well, the next round of official policy in Japan will likely demand a coordinated fiscal-central bank action that brings something entirely new to the table – a policy that will take considerable time to plan and coordinate. 

An expansion of the existing QQE programme would inevitably founder on the rocks of the law of diminishing returns and has already created a completely dysfunctional Japanese government bond market and excessive public ownership of corporate bonds and equities. 

Poland’s central banker mentioned that he wouldn’t have a problem with EURPLN spiking to 5 in a Brexit scenario. This helped EURPLN sharply higher, though PLN was already vulnerable, so it was easy to guide the market lower, and Poland should be happy to see a weaker currency anyway, given deflationary risks.


EURUSD has been a very technical pair in recent days as the market awaits the Brexit vote and ponders the future of Federal Open Market Committee policy after the shockingly weak payrolls blasted the USD for steep losses. 

Based on the tendency to seek out the 61.8% retracement within a triangulating tendency, the next resistance level is the 1.1345 area if we get up there, and the downside swing is clearly etched at the 1.1225 area of the recent lows, a break of which post-FOMC meeting opens up for another 1.1100 and then possibly a run to 1.1000 and more to the downside.


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Source: Saxo Bank

The G-10 rundown

USD – Apparently an inferior safe haven to the Japanese yen, but have a hard time seeing ongoing risk aversion as a negative for the greenback. Tonight’s FOMC one of the least anticipated in some time because Federal Reserve has little room to change its message or talk up impending rate cuts after the ugly May jobs data.

EUR – As noted yesterday, the Brexit issue beginning to wear on the euro in the more obvious safe haven pairings like EURCHF and EURJPY. Have a hard time understanding why EURUSD shouldn’t fall under almost any scenario from these levels. (Risk on: euro weaker, risk off: likely linked to Brexit with some euro contagion needing to be priced…)

JPY – The aggravated rally continues and we can only imagine where it goes. Strong risk of violent two-way swings on intervention fears/rumors/actual intervention if we punch to new lows in USDJPY and see a further, perhaps 2-3% drop in a short order.

GBP – Yesterday’s action likely a microcosm of what awaits at any given time on any given day ahead of the referendum as the heavily short-positioned and highly nervous shorts are vulnerable to brief short squeezes. The Bank of England is conducting its first liquidity operation today.

CHF – Likely to absorb safe-haven flows for now, but the Swiss National Bank is in a bind on announcing anything this Thursday at its meeting as it doesn’t know how the market will behave in either the Brexit/Bremain scenarios, so we likely get inter-meeting action sometime in the future on any renewed pressure on the franc in coming weeks rather than anything this week.

AUD – A bounce overnight... is AUD driven more by AUDNZD than by AUDUSD at the moment? The recent lows in AUDUSD are a Fibo retracement area. Generally expecting AUD vulnerability as long as risk aversion remains the order of the day. Overnight, New South Wales (home of Australia’s largest city, Sydney) introduced a new 4% stamp duty on foreign home buyers to staunch the flow of Chinese investors driving up home prices.

CAD – Surprised we haven’t seen more downside in CAD after the chunky correction in oil prices; we continue to prefer the upside in USDCAD, with a close above 1.3000 more firmly establishing an upside focus.

NZD – The 0.7000/50 area was the key pivot zone on the way up and is now the pivot zone for a downside view as well. Hard to see NZD outperformance as long as risk aversion is the chief market worry.

SEK – CPI a key focus today as EURSEK has taken flight on risk aversion. A weak print could drive another significant extension to the upside in EURSEK.

NOK – A speech later from Norges Bank’s Olsen, but oil and risk appetite are the chief market focus and drivers. EURNOK has worked closer to the key 9.40 area.

Upcoming Economic Calendar Highlights (all times GMT)

  • Sweden May CPI (0730) 
  • UK May CPI (0830) 
  • Euro Zone Apr. Industrial Production (0900) 
  • BoE ILTR Operation (0900) 
  • US May Retail Sales (1230) 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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