The US dollar continues to ride high this morning following yesterday's battering of the single currency at the hands of a dovish European Central Bank governor.
Article / 17 February 2017 at 9:00 GMT

FX Update: Risk appetite dip rattles JPY — #SaxoStrats

Head of FX Strategy / Saxo Bank
  • Need to cover leveraged short derivatives positions might drive US stocks
  • It takes more to get USD back on rally track than Janet Yellen's recent comments 
  • Policy indications from President Trump are far more important 
  • Euro seems to be trading like a safe haven currency, 
  • AUD rally is endangered by many factors
  • Today’s Swedish CPI release might offer the SEK bulls fresh fuel
Trump at  Economic Club of NY 2016
What Trump says is far more important for USD than comments by the Fed's Janet Yellen. Photo: Shutterstock
By John Hardy

A hedge fund might be in trouble with short positions in US S&P500-linked derivatives, we could hear Thursday. The story is that the recent steep ramp in US stock prices might be driven by “unhealthy” reasons as opposed to animal spirits: the need to cover leveraged short derivatives positions. This caught the attention of the wider market and the usual correlations kicked in. The JPY spiked higher and the EUR largely managed to keep pace while the USD dipped. Smaller currencies were under even more pressure at times Thursday. So AUDJPY, for example, saw quite the reversal. 

Still, the severity of the situation is unknown and could as quickly blow over as it materialized. Or…it might not, and in these times of rather low volatility, options hedges against a sudden meltdown certainly look cheap. 

Suddenly market attention was somewhat derailed by the hedge fund story discussed above, but already Wednesday, the market decided it wasn’t sufficiently impressed with Chair Yellen’s rhetoric to support a broader USD rally, meaning that it will take more to get the USD back on the rally track. 

On that account, it is likely that policy indications from President Trump are far more important for this market’s thinking on the USD than the latest tilt in Yellen’s rhetoric. The Fed is still seen as reactive to developments rather than as a driver. So it is likely that markets are “big league” anticipating Trump's speech before a joint session of the US Congress on February 28. Then he will likely outline his policy priorities. Mark your calendars.


AUDJPY is the G7 currency pair with the most beta to any wider risk contagion across markets. Yesterday’s move is so far merely a hitch in the recent rally on the global reflation theme. As we just broke higher here, we will have an eye on whether we see a reversal should this risk wobble turn into something more ominous. Also, let’s not forget the very ugly Australian employment data this week.

The G-10 rundown

USD – The US dollar not doing very well at the moment and it may take a significant boost from Trump’s policy speech on February 28 to get the USD rally firing. As a mild upgrade to Fed expectations this week in the wake of Yellen’s testimony didn’t seem to do the trick.

EUR – The euro seems to be trading like a safe haven currency, most likely merely due to positioning and the liquidity of the currency. We don’t see much to like at the moment and political uncertainty drags on with the latest Greece bailout term discussions still up in the air and elections dead head. Still, discussion in ECB minutes of capital key adjustments got some notice yesterday (this would allow heavier allocation to buying peripheral debt and thus a reducing of peripheral spreads if implemented). The ECB merely said that “limited and temporary deviations [to the capital key distribution] were possible and inevitable” – doesn’t sound like a new policy direction. For that, we would need to see the ECB claiming that it was abandoning the capital key to ensure transmission of its policy was having maximum impact across the EU – likely a political step too far at this point.

JPY – continues to trade in negative correlation with the reflation trade – watching risk appetite and yields for now.

GBP – very disappointing week for sterling, as EURGBP failed to trigger lower – today’s retail sales from the UK could see the dynamic worsening if these come in weak.

CHF – nothing to see here, moving swiftly along…

AUD – the AUD rally suffering a wobble yesterday and this could turn into something worse if risk appetite broadly falters. A weak employment report this week and a move by Chinese regulators to stop investors from buying foreign property could also weigh on the market’s enthusiasm for AUD.

CAD – A hammer reversal yesterday in USDCAD , perhaps on a bit of risk contagion. Canadian data has been surprising to the strong side almost universally recently, but 1.3000 has yet to give – we prefer to focus higher as long as that level remains in place.

NZD – kiwi looking green in the face, as the NZDUSD has turned back lower after a dead cat bounce – the recent lows there look like an important pivot point for a possible capitulation. And AUDNZD is nearing that key 1.0750 level that could open up for a considerable break higher.

SEKSEK doing remarkably well in the wake of what was seen as a dovish disappointment from the Riksbank this week – let’s see if today’s Swedish CPI release can offer the SEK bulls fresh fuel.

NOK – a bit tough to understand the driver for a firming NOK here – but let’s see if EURNOK can follow through to new lows below as it has touched the lows for the cycle over the last few trading sessions below 8.85.

— Edited by Clemens Bomsdorf

John J Hardy is head of FX strategy at Saxo Bank


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