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Article / 30 September 2016 at 7:36 GMT

FX Update: Old fashioned risk-off hits currencies

Head of FX Strategy / Saxo Bank
  • Hedge funds' response to Deutsche sparks broad risk-off
  • G3 and Swissie gain, most other currencies weaken
  • Volatility may spike on quarter-end and banking news

By John J Hardy

Risk sentiment took a sour turn late yesterday when it emerged that a number of hedge funds trading with Deutsche Bank were cutting their derivatives trading exposure with the bank. The general pattern was a strong G3 and Swiss franc and most other currencies weakening, save for the odd-ball kiwi. 

Today is the last day of the quarter and there could be a bit of extra energy in intraday swings on the risk-on/risk-off dynamic today, and in general, if we have a systemic situation in play over Deutsche, volatility can accelerate in either direction on ad hoc statements from officials and incoming news and rumours, as we saw with yesterday’s move.

Australia’s credit growth measure dipped lower again to its lowest level since late 2014 at 5.8% year-on-year and the Caixin China Manufacturing PMI flat-lined again at 50.1 for September. This and the generally weak risk sentiment saw AUD selling off and underlining the importance of the 0.7700/50 upside resistance.


AUDUSD took a turn lower yesterday on the general risk-off sentiment and after once again having found rejection in the key 0.7700/50 pivot zone. The interest in AUD direction should remain high in coming days as we await new Reserve Bank of Australia governor Philip Lowe’s performance at bank's next meeting on Tuesday, with the recent resurgence in AUD perhaps linked to the idea that he is more concerned about financial stability (especially housing) and therefore theoretically less inclined to aggressively ease rates towards the zero bound. Another factor likely driving AUD higher of late has been a surge in some of the big mining stocks to multi-month highs.
 Source: SaxoTraderGO

The G-10 rundown

USD – the US dollar generally coming out ahead on the weak risk appetite, though the JPY seized more of the initiative overnight. US PCE inflation data up later after the Aug. CPI number surprised, though Fed expectations for December have recently dipped back toward 50% and Fed will likely be seen as complacent on data if risk appetite is on the defensive anyway.

EUR – the market mostly indifferent toward the euro so far on the Deutsche Bank concerns, outside of EURCHF and EURJPY, but would expect the single currency weaker against the US dollar as well if the negative vibe persists.

JPY – weak CPI figures overnight, JPY higher on risk sentiment weakening. An interesting recent story out of Japan has been on the potential mis-measurement of GDP, with 2014 levels possibly understated.

GBP – sterling not performing well amidst the weak risk appetite, though the GFK confidence rebounded further in September. GBPUSD may look at the lows for the cycle quickly if market sentiment remains weak.

CHF – the franc picking up a bid on the Deutsche Bank woes and EURCHF running out of range room toward 1.0800.

AUD – we have a negative outlook on the Australian economy, but let’s see if the RBA shares our impression (likely to sound hopeful) at next Tuesday’s RBA. AUDUSD traders remain in limbo for now, as the big downside break level is quite far away at 0.7400/0.7375.

CAD – the OPEC news is fading fast on the onrush of negative sentiment late yesterday. Bulls will bide their time for a 1.3250+ break again in USDCAD and we remain skeptical of the CAD’s potential. Watch the GDP data today and next week also offers up important Canadian data.

NZD – NZD surging after strong confidence surveys overnight, though some of this may be AUDNZD flow linked. Hard to see the little kiwi performing well if market temperature remains high, and the regime of kiwi strength appears to have turned over the last couple of weeks to weakness.

SEK – EURSEK looking comfortable above 9.60 on the recent risk revulsion, which tends to support a more liquid currency. But has the NOKSEK rally run too far?

NOK – some caution on NOK after the EURNOK level at 9.00 was hit. Competing Unemployment Surveys show divergent job market trends – worth continuing to watch these. 

Upcoming Economic Calendar Highlights (all times GMT)
  • 0800 – Norway Sep. Unemployment Rate 
  • 0900 – Euro Zone Aug. Unemployment Rate 
  • 0900 – Euro Zone Sep. CPI Estimate 
  • 1230 – US Aug. Personal Income and Spending 
  • 1230 – US Aug. PCE Inflation 
  • 1230 – Canada Jul. GDP 
  • 1345 – US Sep. Chicago PMI 
  • 1400 – US Sep. Final University of Michigan Sentiment 

– Edited by Clare MacCarthy


John J Hardy is head of FX strategy at Saxo Bank


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