- The murder heightens the uncertainty of EU referendum outcome
- USD clearly stung by the sudden reversal of risk aversion
- Market tries to regain composure after Thursday's huge intraday volatility
Risk aversion reversed on news of the atrocity. Pic: iStock
By John J Hardy
Yesterday was one of the strangest days in market history as it was marked by a further meltdown in risk appetite and extension of safe haven seeking that was suddenly relieved and reversed on the news that a pro-Remain British MP, Jo Cox, was tragically murdered. This only heightens the sense that an outcome next week remains highly uncertain and this terrible event could even swing the vote as it is extremely close to begin with.
The clearest loser on the sudden change in market sentiment yesterday was the US dollar. Sure, USDJPY bounced quite a bit off the lows, but that was only after very extensive prior JPY strength. It appears that any relief of Brexit fears allows expression of the dovishness of the recent Fed meeting, seeing the USD lower against not only sterling, but also risky currencies, particularly EM. Yesterday, the main USD/EM pairs didn’t see heavy trading as traders may prefer trading elsewhere until the result of next week’s referendum is known.
The question for today is how the market gets back down to business after yesterday’s tremendous intraday volatility. The most likely scenario is perhaps a partial unwind of yesterday’s bounce and then a quiet and nervous shift into the weekend, but confidence in the crystal ball is at a minimum in this environment.
USDJPY failed to bounce much despite the sudden lifting of pressure on risk sentiment yesterday, suggesting that the US dollar will remain weak here and in other pairs if Brexit fears continue to lift. Fed chief Janet Yellen's testimony next week is not likely to inspire USD bullishness after her recent shaky performances, as the USD direction is more heavily determined in the short term by the outcome of the UK referendum, and only subsequently by the reaction to the latest Fed developments.
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The G-10 rundown
USD: The brief relief from Brexit fears yesterday showed the USD as the biggest loser at the moment as it allows the market to price in the dovish developments at the Federal Open Market Committee meeting when risk appetite improves. As well, Yellen’s performances are increasingly shaky and uncertain and she will be spending several hours in the spotlight next week, hardly likely to inspire confidence in the greenback near term.
EUR: We can understand the bounce in EURUSD on yesterday’s risk sentiment bounce, but still suspect a low ceiling there as the single currency may collapse against sterling in the event of a Bremain and will weaken sharply on a Brexit against other majors.
JPY: Intervention is imminent on further JPY strength, but hard to know exactly at what level, after the verbal intervention from Japan’s finance ministry escalated once again overnight. Perhaps they are hoping to hold off until the Brexit vote itself?
GBP: Bounced sharply on yesterday’s developments – but futile to draw a bead on market direction ahead of the weekend.
CHF: Trading as a function of the rise and fall in Brexit fears, which of course ebbed suddenly yesterday, but could just as easily rise again if fresh polls over the weekend fail to show any shift in voting intentions.
AUD: Riskier currencies all bouncing in sympathy with yesterday’s whiplash shift in sentiment. Keeps uncertainty alive for the AUDUSD pair between 0.7275 and 0.7500.
CAD: Bounce in CAD a bit hard to justify except by correlation as oil closed steeply lower yesterday, though it has bounced a bit overnight. Note CPI release today.
NZD: Bears were trying to get something going below 0.7000 in NZDUSD yesterday until the dramatic shift in sentiment sent the action back higher, so watching the 0.6965 area lows as the downside trigger now.
SEK: Trying to decide whether yesterday’s break above 9.38 in EURSEK was valid – assuming a weak negative correlation in EURSEK with risk appetite. Note that USDSEK interacting with 200-day moving average.
NOK: interesting EURNOK still above the resistance level broken yesterday (9.40) and gaining despite yesterday’s shift in risk sentiment. This looks NOK bearish for now. Next Thursday’s Norges Bank next focus.
Upcoming Economic Calendar Highlights (all times GMT)
- Eurozone ECB’s Coeure to Speak (1145)
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- Canada May CPI (1230)
- Eurozone ECB President Draghi to Speak (1500)
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank