- Risk appetite boosted by strong response to Xi's speech
- Commodity dollars stage comeback as JPY wilts
- TRY hits new low and RUB thoroughly trashed
By John J Hardy
China’s leader Xi Jinping delivered a much anticipated speech at the Bo’ao Forum overnight, and the promise to lower auto tariffs and open up China’s economy, while taking a “aren’t we all better than to lurch into a trade war” tone was seen as providing significant hope that the US and China can salvage a productive relationship. In any case, it is clear that the market is obsessed with every trade-related headline at the moment, with little else to go on in event risk terms. Given the violence in directional changes and the risk that the next Trump tweet will darken the mood once again, it is tough to speculate how long the positive mood may last. JPY crosses are making hay while the sun shines on a new financial year it seems and may continue to do so if the focus shifts back to policy normalisation, with the next key event risk for the JPY the April 27 Bank of Japan announcement.
Traditionally risk correlated currencies like the commodity dollars staged a further comeback yesterday versus the weak G3 currencies, but EM was a mixed bag. The Turkish lira dipped to fresh lows for the cycle on further signalling from President Erdogan that he is happy to interfere with interest rate policy, as he bizarrely promising to “save” investors with lower rates. This rather tone deaf pronouncement was made amid promises to plough USD 34 billion into a new investment scheme as he pursues a growth-at-all-costs policy. The lira will continue to act as an escape valve, it appears, as foreign capital shies away from the risk of negative real rates on the lack of fiscal probity.
Elsewhere, the ruble was taken behind the shed for a thrashing on the latest sanctions aimed at the oligarch Deripaska’s companies, as US based investments in his operations have been forbidden. This resulted in a meltdown in the targeted company and an ugly 10% drop in the Russian equity index. Exposure to Russian assets is clearly becoming a liability and many investment vehicles in the west are likely throwing in the towel, and the ruble tumbled some 4% versus the USD yesterday. On top of the latest sanctions, the gas attack in Syria risks a further round of sanctions against Russian assets the could heighten the already fraught relationship between Russia and the west.
The JPY is the weakest G10 currency at the moment as Kuroda was out yesterday touting the BoJ’s intention to maintain “powerful” easing. If that is the case, what was the point in recently airing that the BoJ has started internal discussions on how to unwind its policy stance?
Cross-JPY has raliied smartly lately as key support lines in equity markets have made a stand, but also perhaps as the transition to a financial year in Japan has led to a slackening of hedging flows. For now, an extension in the rally in risk appetite could see the AUDJPY comeback pulling higher toward the 84.00 resistance area before facing more significant resistance.
The G-10 rundown
USD – the USD is wilting as risk appetite returns and the market perhaps gets back to pondering the US fiscal outlook. Next status check on the greenback up with tomorrow’s US CPI release and FOMC minutes.
EUR – the euro is gaining the upper hand against the weak JPY and USD at the moment, but not much else. Implied and realized volatility continues to collapse as traders are at a loss for a near-term policy catalyst for the single currency.
JPY – the JPY is at the bottom of the heap at the moment and may stay that way if the mood can stay positive across global markets for a few sessions. Next pivotal test over the Bank of Japan meeting on April 27.
– sterling mulling the cycle lows in EURGBP – not sure what it will take to push the pair over the edge, but the technicals look promising. Interesting profile in Bloomberg
, by the way, of the new UK-friendly German finance minister Scholz.
CHF – EURCHF looking at those cycle highs above 1.1800 soon and could taken them out if we can put together a few days of positive sentiment and rising bond yields.
AUD – the Aussie trying to get something going with its best rally day in some time overnight, likely driven by the response to Xi’s speech. If AUDUSD can work back above 0.7800 again, the rally may turn into something bigger than all previous bounce attempts and confound our bearish expectations for the currency for now.
CAD – USDCAD has drooped back toward its 200-day moving average on the USD weakness and resurgence in crude prices
NZD – the kiwi pulling toward the high end of the range versus the greenback again – are we really going to challenge the highs for the cycle again. Would expect increasingly stern Reserve Bank of New Zealand observations on the currency as soon as the May 10 RBNZ meeting as we await an impression of new governor Orr’s style.
SEK – the krona going nowhere at the moment near cycle lows and waiting for whether the Thursday CPI throws the currency a lifeline. The weak Norwegian CPI print this morning has thrown at least a temporary spanner in the works for NOKSEK bulls.
NOK – an ugly miss on the March CPI data weighs against the NOK and may cap its ambitions at the moment, as the core CPI print stumbled to 1.2% year-on-year and saps anticipation for Norges Bank rate hikes.
Upcoming Economic Calendar Highlights (all times GMT)
- 0930 – UK BoE’s Haldane to speak
- 1000 – US Mar. NFIB Small Business Optimism
- 1215 – Canada Mar Housing Starts
- 1230 – Canada Mar. Building Permits
- 1230 – US Mar. PPI
- 2230 – US Fed’s Bostic (Voter) to speak
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank