Global markets are reeling this morning after the US president trumped his previously announced tariffs on $50bn worth of Chinese imports with the threat of another $200bn worth should the Chinese retaliate with penalties of their own on his initial tariffs. The heightened fear of a full-blown trade war has slammed into equities and EM currencies with the usual safe-haven assets – gold, bonds and the Swiss franc – gaining.
Article / 12 April 2017 at 7:08 GMT

FX Update: Half-hearted risk-off still sees JPY spiking — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Risk-off sentiment spikes gold, JPY, US yields retreat
  • Equity markets 'rangebound and uninspiring'
  • North Korea remains a major risk factor

North Korea
 Tensions surrounding North Korea continue to rise with the US moving against Pyongyang and China playing its cards close to its chest. Photo: Shutterstock

By John J Hardy

The markets have slipped into a half-hearted expression of risk-off as US Treasury yields have dipped sharply again to threaten Friday’s post-US jobs report lows, gold has leaped through resistance, and USDJPY has plunged well below 110 and is eyeing its 200-day moving average around 108.70. 

Equity markets remain rangebound and uninspiring, but the ability to maintain the ranges in most major markets suggests little sense of panic. The three drivers giving the markets pause are the confrontation over Syria, China now threatening North Korea in addition to the US sending a fleet of ships to the region, and the French presidential election, where the 10-year Germany-France spread is now only a few basis points from the highs for the cycle.  

The combination of threats has boosted JPY most, but it is tough to jump on board at these levels as it wouldn’t take much to brighten the mood. While oil prices remain high, US president Trump has defused some of the tension by indicating no interest to get involved in the war in Syria. Meanwhile, the odds are that the France election drama notches rapidly lower in the first round if we get the expected Macron-Le Pen run off after the April 23 first round. 

That leaves North Korea as the last and less predictable point of interest. Something feels a bit more serious this time around relative to the past situations as China has clearly become less friendly towards its neighbour, having shut down trade in coal recently with the renegade country, and may now be even taking a more threatening stance, if we’re to believe corners of the state sponsored media.

It's a testy trading environment with this collective holding of breath, but we do have a Bank of Canada meeting today that would seem to require some admission from the BoC that the economy is performing very well. How much this will garner notice in the otherwise nervous environment is questionable, especially if equities capitulate lower and we get a proper risk-off move. 

USDCAD has been triangulating in a range since achieving 1.3500-plus and needs to make a break soon to deserve notice.

For those looking beyond the immediate France-Germany sovereign yield widening and the potential that the temperature quickly falls again if we move quickly toward a Macron presidency, let’s also consider that Germany-Italy spreads are at fresh wide levels for this cycle above 200 basis points and that Merkel is apparently taking a “no mutual EU debt” line in her campaign platform . Italy has no longer-term future in the EU without some plan to devalue/default/mutualise its debt, and nor does Portugal or Greece. So it will be interesting to see how quickly the focus shifts to this longer-term worry even if the French election provides no shocks. 

It also leads me to believe that any euro relief rally has a relatively low potential.


USDCAD somewhat typical of a number of major USD pairs, as the action traces a triangle of lower highs and higher lows. Perhaps today’s Bank of Canada meeting provides a breakout, with risks pointing lower from the BoC and oil and higher if risk-off worsens.

Source: Saxo Bank
The G-10 rundown

USD – conflicting drivers for the greenback as lower US yields and weaker anticipation of Fed moves is a negative, while risk off nominally supportive in a broad sense.

EUR – the euro can’t mount much of a rally against the USD as France election worries weigh. Note our concerns on Italy spreads above, however, as we wonder how much pent-up demand there is for the euro even if the French election offers no shocks.

JPY – the yen absorbing considerable inflows as the risk-off in Asia has been more pronounced, driven by the ill ease over North Korea, but possibly also by rising worries that China is heading for a slowdown after a notable bout of credit tightening.

GBP – EURGBP trading heavy after the mixed UK CPI data (slightly higher than expected month-on-month headline, while year-on-year core slightly lower than expected). Tough to draw a bead on sterling until we get clarity on the French election. The GBPUSD chart has been triangulating for months.

CHF – EURCHF grinding back lower as we await France elections and whether these can finally jolt the pair into rallying on an EU-friendly outcome.

AUD – the Aussie looks weak given current market sentiment and AUDJPY is a classic JPY pair to drop when the focus is on unwinding of carry trades. The employment report up in early Asian hours tonight and 0.7500 is the approximate bull-bear line in AUDUSD.

CAD – the Bank of Canada in focus here, with some risk of a more positive assessment of the economy. Generally we have somewhat offsetting drivers for CAD – risk off is not helpful, but the strong oil prices and strong Canadian economic data are positive.

NZD – the pivotal 1.0750 area remains intact for AUDNZD, while NZDUSD remains in an impossibly tight descending channel – nothing much to like about the kiwi as long as market nerves are frayed.

SEK – the krona showing some resilience despite a slight disappointment on the headline month-on-month CPI number – EURSEK bears may be emboldened here for a run back below 9.50 after another small rally attempt turned back.

NOK – EURNOK diving further back into the range and could work lower still as oil prices are back near the highs of the cycle.

Upcoming Economic Calendar Highlights (all times GMT)

  • 0830 – UK Mar. Jobless Claims Change 
  • 0830 – UK Feb. Unemployment Rate / Average Hourly Earnings 
  • 0830 – UK BoE’s Carney to Speak at Fintech Conference 
  • 1400 – Canada Bank of Canada announcement 
  • 1400 – US Fed’s Kaplan (FOMC Voter) to Speak 
  • 1515 – Canada Bank of Canada Governor Poloz Press Conference 

— Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank


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