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Article / 13 July 2016 at 8:01 GMT

FX Update: JPY selloff eases, USD puts up a fight

Head of FX Strategy / Saxo Bank
  • USD rally eases on Japanese helicopter money denial
  • Government is the main player here, not the BoJ
  • Sterling rally found additional legs overnight
  • BoE likely to cut rates tomorrow, guidance will be important
 It's coming, though not as quickly as once thought. Pic: iStock

By John J Hardy

Japan’s Chief Cabinet Secretary Yoshihide Suga denied talk of helicopter money overnight, which rapidly applied the brakes to the JPY selloff that was kicked off at the beginning of the week in the wake of the Upper House elections. By issuing such a denial, it suggests that the wait for helicopter money may prove a longer one, even if we all know it is coming. As the critical actor from Japan from here is the government rather than the Bank of Japan, we do risk a potential disappointment at the July 29 BoJ meeting. 

The retreat in commodity currencies across the board at the same time as the yen rallied suggests that these have been popular currencies to buy against the yen on carry implications. The 80.00 level in AUDJPY once again provided resistance and an attempted poke to new local highs in AUDUSD has turned back lower in a sign of hesitancy. 

The sterling rally found additional legs overnight above 1.3300 before easing back lower. The Bank of England is seen as likely to cut rates tomorrow, with guidance easily as important as whether the bank cuts – it’s the first key test of the GBP now that we have a more two-way market in the wake of the Brexit vote. 

The likely removal of pro-austerity chancellor George Osborne and likely strong fiscal measures helps relieve some of the risks on the UK economic front. It’s too early for relevant economic data to emerge, but we do have a June RICS House Price Balance data point tonight, which hopefully includes some of the effect from the Brexit and already showed a very sharp deceleration in May. The July release of this best-in-class housing market survey will be more interesting next month for comparing the deceleration in the UK’s key property market with past crises.

Today we have a Bank of Canada meeting and US Fed Beige Book release on tap. Canadian data has not sounded any dramatic negative notes lately save for the recent ugly trade deficit number and perhaps a listless Ivey PMI, but Canada is very poorly positioned in structural terms for further economic weakness, given its turbo-charged housing bubble and generally woefully overleveraged private sector. The risks for CAD over this meeting are tilted to the downside and CAD is already severely under-performing its commodity currency peers AUD and NZD. We’re watching the upside resistance in USDCAD ahead of 1.3150 in coming sessions.


Today a key input for the USDCAD action after a long period of consolidation and what resembles a “double” upside-down head and shoulders formation with the necklines coming in near recent local highs. A strong surge and close above the neckline points to significant further gains, possible starting with 1.38 – the classic head-and-shoulders target and near the 61.8% retracement of the entire selloff wave from 1.4690 to the 1.2460 lows.
 Source: Saxo Bank. Create your own charts with SaxoTraderGO click here to learn more

The G10 rundown

USD – Pushing back stronger in most pairs outside of USDJPY, with USDCHF offering the firmest sign of USD strength while EURUSD also offered up a low-volatility bearish reversal yesterday – need a close below 1.10 there to set the momentum ball rolling.

EUR – under pressure here versus the USD and even GBP and generally out of favour on further strength in risk appetite. Europe’s banks are the wildcard for European markets.

JPY – selloff has abated after official rejection of helicopter money theme. 105.00/50 is a critical resistance area in USDJPY and we stopped just short of this zone. Wait for the next move from Japanese officialdom could prove a longer one than anticipated.

GBP – overnight highs looked like a positioning squeeze as we await the BoE tomorrow. Some risk of a squeeze higher in sterling if BoE underdelivers relative to expectations, but we expect low for the cycle is not in for GBPUSD.

CHF – the franc’s recent weakness partially associated with JPY selloff, but EURCHF has managed to clear 1.0900 and hold thus far and USDCHF is strongly up through the 200-day moving average and has parity as the next key objective.

AUD – AUDJPY turned back at 80.00 area and AUDUSD failing to punch higher after local highs taken out yesterday. AUD looks resilient until proven otherwise, though AUDUSD rally has been a churning affair.

CAD – Bank of Canada today – risks skewed to the downside for dovish guidance. Watching recent USDCAD highs as trigger for more gains to come.

NZD – rally finally wearing thin after NZDUSD teased at new highs yesterday – JPY strength may be a key headwind for NZD. As well, AUDNZD showing signs of downtrend exhaustion. Another leg of NZD weakness needed for this to register as more significant for beleaguered NZD bears. July 18 NZ Q2 CPI release next key.

SEK – no follow through yet on . A bit surprised to see EURSEK this elevated given the heady rally in equities, but market is perhaps not a fan of heavily negative-yielding currencies.

NOK – EURNOK back mid-range and amid lack of notable drivers. Watching risk appetite and oil.

Upcoming Economic Calendar Highlights (GMT)
  • Eurozone May Industrial Production (0900) 
  • Canada Bank of Canada Meeting (1400) 
  • US Fed’s Beige Book (1800) 
  • UK Jun. RICS House Price Balance (2301) 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank

13 July
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